November 1999

What's New in Finances

Study reveals that frequent trades hurt investment returns

11/1/1999 -

A recent study done by Terry Odean, Finance Professor at the University of California, showed that investors often think they know more than they actually do. Their overconfidence leads to more frequent trading -- and their frequent trading negatively affects their investment returns.

Odean also studied 1,607 investors who switched to online trading from 1991 to 1996. He found that before going online, these investors had returns that generally beat the market by two percent annually. After switching to online trading, they traded more frequently and their returns were lower than the market by more than three percentage points. Their returns were also lower than a control group of similar offline investors.

In your investing, keep this study in mind, and realize that too-frequent trading is not likely to benefit your portfolio.