Are you trading too much?

Wall Street is begging you to trade, but is that the right approach?

By Jamie Dlugosch Feb 18, 2010 7:16PM

trader © Comstock/SuperStockThe financial crisis, stock market crash and bear market of the last two years led many to believe that buy and hold investing is a sure way to performance mediocrity. Trading is surely the way to go in this day and age.

 

But like most things the pendulum swing to trading may have gone too far.

 

And for what benefit? According to this Wall Street Journal article a study by discount brokers of some 2 million trades found that those who trade the most fared no better than those who traded the least.

 

Given that excessive trading increases expenses and tax liabilities it makes little sense to move in and out of stocks so quickly. Why then do investors trade so much if the improvement in performance is negligible? (Don't trade these 10 stocks for 2010)

 

The answer is simple: Wall Street wants you to trade and trade excessively.

 

Look no further than the battle taking place no amongst discount brokers with respect to commission free exchange traded fund (ETF) trades. Fidelity offered the latest salvo by cutting tiered commissions and eliminating fees on trades of 25 I-Shares ETF’s.

 

The Fidelity move was in direct response to Charles Schwab cutting commissions in January.

 

On the surface these lower fees may appear to benefit investors, but given the reality of minimal gains from trading these moves ultimately hurt more in the long run. In other words the lower fees are a gimmick to encourage more trading.

 

That is the last thing investors should be doing according to those that believe that patient investors have the advantage over those looking to beat the market over the short term.

 

Certainly the lure to trade more is powerful. A market in free fall will do that to even the most steeled investor. Of course knowing exactly when to sell or when to buy is a fool’s dream.

 

Of course since buy and hold investing has been ineffective for 10 years or more what is an investor to do?

 

I think the answer is somewhere in the middle. Trading is compelling and more and more of us are doing it as evidenced by trading volumes in the market. We just need to keep our trading under control.

 

By that I mean resist the temptation to trade excessively. It does not work.

 

Instead, I prefer to surf the market moving gently to the waves. It is ok to sell en masse as I suggested in a series of articles in September of 2008 and it is ok to hold during a correction as I suggested doing this year.

 

It really just depends on the situation. The trick is to not get carried away because if you loose your head and trade extensively you will likely never find the returns needed to make it worth while.

 

Even the best institutional money managers have trouble with this fact. Some are not even aware of excessive trading until it is pointed out to them.

 

My best suggestion is that when you feel like trading, take a step back every now and then and simply refuse to do so. Not every time, but by reducing your trading you might actually come out on top. (I think these 10 stocks will come out on top in 2010)

 

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