The Effect of Frequent Trading on Investment Results

Physician's Money Digest, November 2005, Volume 12, Issue 15

Dr. Odean and Dr. Barber from theUniversity of California have been examiningdata from investor householdssince the late 1980s. In one study, theyaccessed account data from 66,000households at a large discount brokeragefirm between 1991 and 1996. The purposewas to determine if the householdsthat traded the most actually benefitedfrom it. They found that the group thattraded the least earned 5% more than thegroup that traded the most. If this studyis taken over 2 years, the differencebetween the two groups is even moresignificant. This research indicates thatfrequent trading is not advantageous tothe individual investor, especially onewho may not be able to make sufficientlywise decisions to overcome the costs ofrecurrent trading.