Active trading often leads to lower investment returns from "summary" of The Little Book of Behavioral Investing by James Montier
One of the most common mistakes that investors make is engaging in active trading, believing that they can outsmart the market and earn higher returns. However, research has shown time and time again that this approach often leads to lower investment returns in the long run.
The problem with active trading is that it is driven by emotions such as fear and greed, rather than rational decision-making. Investors who engage in frequent buying and selling are more likely to succumb to these emotions, leading to impulsive decisions that can harm their overall portfolio performance.
Furthermore, active trading incurs higher transaction costs, such as brokerage fees and taxes, which eat into potential returns. This constant buying and selling also leads to a lack of diversification in the portfolio, increasing the overall risk of the investments.
In addition, active trading is based on the flawed belief that one can accurately predict market movements and consistently beat the market. However, research has shown that even professional fund managers struggle to outperform the market consistently over time.
Instead of trying to time the market or pick individual stocks, investors should focus on a long-term, buy-and-hold strategy that is based on a diversified portfolio of low-cost index funds. This approach minimizes transaction costs, reduces emotional decision-making, and increases the chances of earning higher investment returns over the long term.
By avoiding the pitfalls of active trading and adopting a more disciplined and rational investment approach, investors can improve their chances of achieving their financial goals and building long-term wealth.
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