Does Frequent Trading Result in Better Returns?

  By Daniel Bloom
Daniel Bloom

Day-to-day stock-market volatility may convince some investors that they should be making frequent trades within their investment portfolios.

On top of that, financial television wants you to believe that the next 10 minutes are vastly different than the prior 10 minutes because they want to sell ad time. That’s really what their business is all about.

Financial newspapers want you to believe that tomorrow is vastly different from yesterday because they want to sell you a newspaper. If the headline on a newspaper read “Nothing Changes Today,” you wouldn’t buy it.

It may come as a surprise, but some of the savviest investors buy and hold portfolios for years without responding to the market’s daily fluctuations. Mark Hulbert, author of the Hulbert Financial Digest, analyzed the performance of 200 investment advisors and found that the top 3 newsletters, based on their performance over 25 years, held stocks for an average of 3 to 7 years. According to Hilbert, “Their holding periods are about as far away from high-frequency trading as you can imagine.”

Additionally, investors who get swept up in trading trends can easily get whipsawed by sudden reversals. What about investors who bought the day of the last presidential election when markets went up sharply, only to be caught in a huge downdraft the next day? Those who sold during the declines of the first week after the election may have missed the returns of Thanksgiving week, which were the best in 6 months.

Remember, the purpose of the media is not necessarily to give you the best information. It’s to keep you watching or to keep you reading. In a big economy like the U.S., the stock market goes up and down 2% or 3% or 4% in a day, or more, on a regular basis.

The biggest challenge to an investor is to ignore the daily noise, which actually provides no meaningful information for your long-term investment success. If you try to follow it, it could, in fact, hurt your performance.

For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s newest white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.