Don't trade stocks often, and trade even less when the market soars or crashes

Cost

Free. The hard part is that when you see news you want to act, and when everyone else is making money you want to follow and add more. You have to hold back.

What you get

This study looked at the household accounts of 66,465 American discount brokerage customers, over 1991 to 1996. The group that traded most often had an annualized return of 11.4%, meaning it earned 11.4% a year on average. Over the same period the whole market returned 17.9% and the average household 16.4%. The average household's annual turnover was 75%: in one year it replaced three quarters of its stocks. The gross returns (what was earned before deducting fees) of the frequently trading group and the infrequently trading group differed very little, so the gap came mainly from the trading costs paid on buying and selling (United States, 1991 to 1996). Domestic data: the study used daily account-level data from the Shanghai Stock Exchange (上海证券交易所), covering all of about 40,000,000 (4000万) accounts. The sample period was July 2014 to December 2015, 18 months in all. In those 18 months the Shanghai Composite Index (上证综指) first rose more than 150%. It peaked at 5166.35 points on June 12, 2015, and then fell another 40% by the end of December. Household accounts were divided into four tiers by starting market value. The smallest tier made up 85% of all household accounts, and the largest tier made up 0.5%. The two tiers had about the same total starting stock value, 880,000,000,000 (8800亿) CNY and 808,000,000,000 (8080亿) CNY respectively. The result: the smallest 85% lost 250,000,000,000 (2500亿) CNY from active trading, and the largest 0.5% made 254,000,000,000 (2540亿) CNY. The "loss" here is measured against simply holding and doing nothing through the same market run. Each of the two figures is about 30% of that group's starting stock value, 28% for the first and 31% for the second. For comparison, the two and a half years before June 2014 were a calmer market. For any 18 months in that period, the same kind of gap was only 1% to 3% of starting value. In this run, household accounts turned over their stocks about every three weeks, nearly 18 times a year (Shanghai, China, 2014 to 2015; comparison period 2012 to 2014)

Notes

The American data are from the 1990s, and the commission and stamp duty structure of China's A-shares is different from it, but the principle that "the higher the turnover, the lower the return you keep" is the same. The domestic study did not say not to buy stocks. What it calculated is that, over the same market run, the more actively the small-account end traded, the more of its money flowed to the other side of the trades. The ones who took this money were also not institutions but the biggest individual accounts: in this period about 90% of Shanghai Stock Exchange trading volume came from retail accounts. The claim "90% of retail investors lose money" that circulates online has no verifiable official statistic, and this item does not use that number. Turnover can be compared: in this run, domestic household accounts turned over nearly 18 times a year, while the American households turned over only three quarters in a year. In calm years the domestic gap was only 1% to 3%, so the time to hold back most is when the market is hottest. This is not investment advice.

Evidence grade

A : Specific numbers from meta-analyses, large cohorts or randomized trials; for law and policy, the statute or official text.

Sources

1. Barber BM, Odean T (2000). Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. The Journal of Finance 55(2):773-806. https://doi.org/10.1111/0022-1082.00226
2. An L, Lou D, Shi D (2022). Wealth redistribution in bubbles and crashes. Journal of Monetary Economics 126:134-153. https://doi.org/10.1016/j.jmoneco.2022.01.001
3. 同文作者公开的工作论文稿（2021 年 10 月，国内数字按它逐字核对）. https://personal.lse.ac.uk/loud/AnLouShi.pdf

Translated from the Chinese original. Original book, section 5, tip 15. This section is about money and spending. It is general information, not financial or investment advice. Content may be out of date and rules differ by place. When you actually deal with an agency, a doctor or a court, follow what local officials, doctors and lawyers tell you. Disclaimer