Anyone can beat the market, but ...

[nodoodahs]

Can they beat their own worst investing enemy?

Brad Barber and Terrance Odean took the trading records of 66,000 customers of a major discount brokerage firm, from 1991 through 1996, accounting for more than 1.9 million trades.

They divided them into 5 groups based on frequency of trades. The most hyperactive group averaged 240% annual turnover, the most patient group averaged 2.4% turnover. All five groups beat the market index fund by about 1% annually.

However, after trading costs were accounted for, only one group beat the market - the patient group - by about 1%. The hyperactive group lagged the market by about 6.5% after trading costs.

According to Jason Zweig, other studies have confirmed that this occurs with institutional traders, as well.

Do we kill our results by over-managing our portfolios????

[nodoodahs]

Trade count is a function of market strategy and philosophy, discipline, and emotional stability of the participant. Agreed! Some strategies demand turnover, but my main point was about a lack of "discipline and stability" being the undoing of many investors.

You bring up an excellent point about strategy selection influencing trade counts! To the extent that counts are held constant, one must examine their strategy with two points in mind:

1. What amount of funds can I deploy?
2. What is my return per trade?

With fewer funds to spread the cost of trading across, each trade must be "worth more." Will the desire to chase "big spreads" cause me to lose discipline, and go after riskier trades or hold positions too long, or not long enough? Or do I need to take fewer positions (say, a sector rotator being in fewer equities per sector)?

[pete richardson]

That is a fair question. I look at portfolio t/o relative to the investment strategy and philosophy of the investor. There are no hard rules here. For example, if someone claims to be a long term value investor, portfolio t/o
of 50% looks suspicious. Same for a long term growth company investor.
If someone is a sector rotator, it would be natural to expect 30-40% t/o a year as one works through the cycle. If someone is a concept growth investor, portfolio t/o could easily range from 10% to 100% per year.

If transaction costs are impeding an investor's ability to earn competitive returns, then that investor needs to review his/her strategy and particularly how well and efficiently information that guides portfolio selection is being delivered and used. As well, if the performance discipline is a sound one. but t/o seems high or low, then may be the emotional bearing of the investor needs examination (too much fear and/or greed).