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08-06-2011, 07:47 AM
Business Times - 08 Jun 2011
The affluent and the trading paradox
(NEW YORK) For nearly all investors, frequent trading is a terrible proposition. Many people know they trade more than they should - but they just can't stop.
The fundamental problem with frequent trading is that very few people can consistently outsmart the market - at least not while playing by the rules.
Behavioural biases lead many of us to trade at the wrong times. It can be comforting, for example, to buy when stocks are rising and nearly irresistible to sell when they are plummeting, as US stocks did last week. This means buying high and selling low, a fine recipe for financial misery.
Furthermore, when costs mount, as they will when you trade frequently, the odds of beating the market are slim indeed.
It's been long known that these kinds of mistakes have serious consequences. A study by Dalbar, a mutual fund research firm in Boston, found that in the 20 years through December, the average stock fund investor had annualized returns of 3.8 per cent, compared with 9.1 per cent for the Standard & Poor's 500-stock index. The average person, in short, would have been much better off buying an index fund and holding it for 20 years.
Now, a new study shows that many well-heeled and apparently well-informed people feel compelled to trade frequently - while believing that their trading is excessive (see story above).
The existence of this 'trading paradox' is a central finding of the study, which was conducted by Barclays Wealth, a division of Barclays, the global bank based in London.
'This trading paradox exists, to one degree or another, everywhere in the world,' Greg Davies, the head of behavioural and quantitative finance at Barclays Wealth, said in a telephone interview. 'Not everyone is prone to frequent trading, but among those who feel that they must trade frequently to do well, there is a substantial proportion who are troubled by their behaviour. This is a novel finding for me.'
At the core of the study was a survey of more than 2,000 affluent people around the world conducted in January and February by Ledbury Research, a market research firm based in London. Participants were people whose net worth met a minimum threshold - for example, in Britain, it was £pounds;1 million (S$2 million).
The survey asked participants a series of questions about their behaviour. It found that 40 per cent said they practise market timing rather than stick to a buy- and-hold strategy.
The market timers were 'over three times more likely to believe they trade too much', the study said. Nearly half of those who said that 'you have to buy and sell often' to do well also said 'I buy and sell investments more than I should'.
How is it that so many people hold apparently contradictory views, believing both that frequent trading is beneficial and that they trade too much for their own good? The answer isn't simple, the study said.
'On the face of it,' it said, 'you might think that those who were trading more actively would be more experienced, sophisticated and able to control themselves, but that seems not to be the case - trading becomes addictive.'
In fact, the study found, 'the basic problem is that investors feel they need to engage in active trading, but they cannot then control how much they do it'. Much like overeating, over the top trading isn't easily curbed, Mr Davies said.
Overall, nearly half of the investors said they needed more self-control. Strategies like setting deadlines to avoid procrastination and using cooling-off periods to reflect on decisions were widely used, the study found.
Men were more likely to say they engage in market timing than women - 41 per cent of men versus 36 per cent of women. That's in line with research suggesting that women are generally more careful and consistent investors than men. Women were far less likely to say they overtrade - with only 11 per cent of women saying they do, versus 17 per cent of men.
Based on data collected for the survey, anyway, the US looks like a fairly sensible place. Only about a quarter of American investors said they engaged in market timing compared with about half globally. Only 8 per cent said they traded too frequently, compared with 16 per cent globally.
The reasons for this aren't entirely clear. Mr Davies said it may be that affluent people in the US have had more time to grow accustomed to dealing with wealth than, say, people in an emerging market like Malaysia.
New York Times
The affluent and the trading paradox
(NEW YORK) For nearly all investors, frequent trading is a terrible proposition. Many people know they trade more than they should - but they just can't stop.
The fundamental problem with frequent trading is that very few people can consistently outsmart the market - at least not while playing by the rules.
Behavioural biases lead many of us to trade at the wrong times. It can be comforting, for example, to buy when stocks are rising and nearly irresistible to sell when they are plummeting, as US stocks did last week. This means buying high and selling low, a fine recipe for financial misery.
Furthermore, when costs mount, as they will when you trade frequently, the odds of beating the market are slim indeed.
It's been long known that these kinds of mistakes have serious consequences. A study by Dalbar, a mutual fund research firm in Boston, found that in the 20 years through December, the average stock fund investor had annualized returns of 3.8 per cent, compared with 9.1 per cent for the Standard & Poor's 500-stock index. The average person, in short, would have been much better off buying an index fund and holding it for 20 years.
Now, a new study shows that many well-heeled and apparently well-informed people feel compelled to trade frequently - while believing that their trading is excessive (see story above).
The existence of this 'trading paradox' is a central finding of the study, which was conducted by Barclays Wealth, a division of Barclays, the global bank based in London.
'This trading paradox exists, to one degree or another, everywhere in the world,' Greg Davies, the head of behavioural and quantitative finance at Barclays Wealth, said in a telephone interview. 'Not everyone is prone to frequent trading, but among those who feel that they must trade frequently to do well, there is a substantial proportion who are troubled by their behaviour. This is a novel finding for me.'
At the core of the study was a survey of more than 2,000 affluent people around the world conducted in January and February by Ledbury Research, a market research firm based in London. Participants were people whose net worth met a minimum threshold - for example, in Britain, it was £pounds;1 million (S$2 million).
The survey asked participants a series of questions about their behaviour. It found that 40 per cent said they practise market timing rather than stick to a buy- and-hold strategy.
The market timers were 'over three times more likely to believe they trade too much', the study said. Nearly half of those who said that 'you have to buy and sell often' to do well also said 'I buy and sell investments more than I should'.
How is it that so many people hold apparently contradictory views, believing both that frequent trading is beneficial and that they trade too much for their own good? The answer isn't simple, the study said.
'On the face of it,' it said, 'you might think that those who were trading more actively would be more experienced, sophisticated and able to control themselves, but that seems not to be the case - trading becomes addictive.'
In fact, the study found, 'the basic problem is that investors feel they need to engage in active trading, but they cannot then control how much they do it'. Much like overeating, over the top trading isn't easily curbed, Mr Davies said.
Overall, nearly half of the investors said they needed more self-control. Strategies like setting deadlines to avoid procrastination and using cooling-off periods to reflect on decisions were widely used, the study found.
Men were more likely to say they engage in market timing than women - 41 per cent of men versus 36 per cent of women. That's in line with research suggesting that women are generally more careful and consistent investors than men. Women were far less likely to say they overtrade - with only 11 per cent of women saying they do, versus 17 per cent of men.
Based on data collected for the survey, anyway, the US looks like a fairly sensible place. Only about a quarter of American investors said they engaged in market timing compared with about half globally. Only 8 per cent said they traded too frequently, compared with 16 per cent globally.
The reasons for this aren't entirely clear. Mr Davies said it may be that affluent people in the US have had more time to grow accustomed to dealing with wealth than, say, people in an emerging market like Malaysia.
New York Times
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