Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors
Read the paperopens doi.org in a new tab
What they found
The most cited study of retail investor performance. Using 66,465 households at a large discount broker from 1991 to 1996, Barber and Odean found that the average household earned an annual net return of 16.4% against a market return of 17.9%, and that the 20% of households that traded most actively earned only 11.4%. Households turned over about 75% of their portfolios each year. Gross returns were roughly the same across activity levels; the difference was entirely transaction costs. The title's message is the finding: trading itself, not stock selection, was the problem.
What you can use
- The households that traded most underperformed the market by about 6.5 percentage points a year, entirely because of costs.
- Stock selection was not the issue: gross returns were similar for active and inactive investors.
- Every trade must overcome commissions, spread, and impact; the more you trade, the higher that hurdle compounds.
Caveats
Commissions in the 1990s were far higher than today's zero-commission environment, though spreads and payment for order flow remain. One broker's clients, pre-internet trading.
Tags: retail, transaction-costs, trading-frequency, brokerage-data
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.