Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors

TLDR

Active trading by individual investors holding common stocks incurs a substantial performance penalty. Among 66,465 households, frequent trading yields only 11.4% annual return versus 17.9% market, with an average of 16.4% and high turnover, indicating that overconfidence drives poor performance and that trading is hazardous to wealth.

Abstract

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high‐beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.