Think Twice, Even Thrice, Before Trading

by Mark Hulbert

If the average thing you do as an investor is a mistake, then you ought to do it as little as possible.

Though the logic of this argument is unassailable, investors repeatedly resist it—either by denying it outright or, more commonly, by believing that it applies to everyone but themselves.

For this article I review the evidence I have compiled about portfolio transactions from my more than three decades of tracking the performance of investment advisory newsletters in the Hulbert Financial Digest (HFD). Though the weight of my evidence doesn’t mean that you should never trade, it does show just how large a burden of proof each of us must satisfy before it becomes rational to do so.

HFD Data

To measure the cost of trading, I employed a unique methodology for analyzing each of the hundreds of model portfolios recommended by advisers on the Hulbert Financial Digest’s monitored list. For each portfolio, I created an additional—hypothetical—one that I refer to as the adviser’s “frozen” portfolio. This frozen portfolio contained exactly what its author had placed in his actual portfolio as of the beginning of a given year, but—unlike the actual portfolio—undertook no transactions during the year.

The beauty of this approach is that it does not compare an adviser to an abstract market index or benchmark. Such a comparison is subject to criticism, of course, since the adviser can argue—perhaps even legitimately—that the benchmark does not fairly represent the kind of stock or market sector on which he himself focuses.

Instead, by judging an adviser in relation to his “frozen” portfolio, I am comparing him to himself—absent the trading. It’s much harder for him to wriggle out from underneath the conclusions of such a comparison. If his actual portfolio did worse than his frozen portfolio—something that happens quite often, as you will soon see—then we know conclusively that his trading didn’t add value.

How often? On average, across the many calendar years since the early 1980s that I have studied using this methodology, around two-thirds of the portfolios would have done better by not trading. Furthermore, in no calendar year studied did the majority of portfolios come out ahead of their hypothetical frozen counterparts.

Consider what I found for last year. In calendar-year 2010, the 500 model portfolios the Hulbert Financial Digest tracks would on average have made 18.0% if they had simply stuck with their holdings at the beginning of the year. Their actual portfolios, in contrast, gained 14.6%, or 3.4% less.

What’s fascinating, furthermore, is that I found that this same result held even during years in which there was a change in the stock market’s primary trend during the year. That’s noteworthy, because in such years one might think that portfolios that don’t trade would be at a particular disadvantage. But the advisers still, on average, failed to add value through their trading.

Consider what happened in calendar-year 2009, for example. Through March 9 of that year the stock market plunged, but then it embarked on an explosive rally. It’s difficult to imagine a buy-and-hold posture that made sense at the beginning of that year that didn’t get crushed later in the year. And yet the average frozen portfolio in 2009 gained 29.4%, versus a gain of 28.7% for the average model portfolio.

Academic Evidence

Lest you think that newsletter editors are unique in this regard, consider a major study of individual investors’ behavior. The authors, finance professors Terrance Odean of the University of California—Berkeley and Brad Barber of the University of California—Davis, studied the trades made at 10,000 randomly selected accounts at a major discount brokerage firm between January 1987 and December 1993. (The study can be read at

They focused in particular on all cases in which an investor bought a stock less than 30 days after selling another. It seems reasonable to expect in these cases that the investor believed that the stock that was being bought would outperform the stock that was sold. Yet the professors found that just the opposite was the case.

Gain exclusive access to all of, PLUS our market-beating Model Stock Portfolio — currently trouncing the S&P 4-to-1!


The results weren’t even close, in fact. The researchers found that over the 12 months following the transactions, the stocks that were sold did 3.2% better than the stocks that were bought. Investors would have been far better off had they done nothing.

One Top Newsletter’s Experience

Still not convinced? Consider the amazing experience of an advisory service entitled the Closed-End Country Fund Report. This newsletter is ranked in third place for 10-year performance among all newsletters the Hulbert Financial Digest tracks (through March 31 of this year) and in first place over this period for performance among mutual fund advisory services.

Believe it or not, however, the Closed-End Country Fund Report’s model portfolio has not undertaken even one transaction in nearly seven years. In fact, the last issue of it that we received was in October 2004. Because the newsletter did not formally cease publication at that time, and held out the possibility that it might some day resume, the Hulbert Financial Digest has been faithfully keeping watch over the last-known sighting of its model portfolio.


The implication, hard as it is to believe, is that the average transaction lowers portfolio returns. You don’t have to be a rocket scientist to draw the corollary: If the average transaction lowers returns, you ought to undertake as few of them as possible.

This doesn’t mean you should never, ever make any transactions. But it does mean that the burden of proof you should satisfy before you do trade is probably several orders of magnitude higher than you think.

Mark Hulbert is editor of the Hulbert Financial Digest, a newsletter that ranks the performance of investment advisory newsletters. It is published monthly and is located at 5051B Backlick Rd., Annandale, Va. 22003; 703/750-9060.


Leonard from NY posted over 3 years ago:

Going back around 2-1/2 years, my actual traded value beat my theoretical "frozen" value by almost 20%. Nice to know I beat out all those "professional" advisers. I don't like to toot my own horn, but ... oh, who am I kidding? I *love* to toot my own horn. (Wait a minute -- that sounded kind of weird, didn't it? :) )

William from PA posted over 3 years ago:

I agree with the premise of the article. While I have beaten the markets every year but one since 2000, I have made many more bad decisions than good ones. What saves me is that I do not buy anything but a beaten -down , low-priced stock.The downside on each position is 100%, the maximum upside so-far has proven to be more that 3,600%. So the occasional winners giving 3-30 times returns, while a few go to zero, and most mosey around somewhere near where purchased, have kept me solvent and happy.

From about 2003 through late 2008 I typically traded only 5-10% of my portfolio annually, so I made fewer bad decisions. I am 100% invested in stocks at all times, and so must sell when we need funds for living.In the first 4 months of 2009 I became very active selling most stocks that had held up reasonably well and rolling proceeds into the more volatile stocks in the most beaten-down and cyclical sectors. The results in the remainder of 2009 were fantastically good, but since then they have been only fair, at best. I like my positioning, and am just waiting with the hope the economic recovery will continue past the end of mortgage and foreclosure losses. We'll see.

Paul from CA posted over 3 years ago:

So, what does this sat about today's article on rebalancing?

Marcia from GA posted over 3 years ago:

To answer the question asking what this says about the article on rebalancing, it doesn't say anything at all about it. This article addresses whether active trading is likely to add value to a portfolio. The conclusion as I understand it is that over active trading is not valuable for most investors, even professional investors, and reduces portfolio performance. The article about rebalancing is commentary on a risk control practice. After one has chosen a portfolio, hopefully balanced with equities, bonds, commodities, real estate, and maybe the odd absolute return investment, that suits the individual's risk profile, it is wise to maintain the allocation percentages more or less as chosen. The rebalancing article speaks to this risk control process.

The idea of rebalancing as risk control isn't new and has been accepted by very respected people. Burton Malkiel, hope I spelled the name correctly, Jack Bogle, and a youngster named Liz Ann Sonders at Schwab have all consistently recommended rebalancing as very important for proper portfolio maintenance. Bogle and Malkiel have both been on record a long time as believing annual rebalancing is adequate.

As for frequent trades, well, the famous investor Jesse Livermore said, "It was never my thinking that made big money for me. It was always my sitting.".

Phillip from IN posted over 3 years ago:

Very informative. It does seem as soon as I do sell a stock, that is when it decides to start performing.

Bill from FL posted over 3 years ago:

Very interesting. Where can we see the actual results of your research; i.e., the 1/3 who did better by trading?

Bill from MA posted over 3 years ago:

Wish I'd seen about this great article four months ago. Biggest recent mistake, selling out of Acme Packet at 145% profit, and missing a five-bagger :-(

And beware the "China" backdoor IPO stocks. Last February, frustrated by the AAII's ill-performing Piotroski screen, I deviated from that list to buy some stock in "value"-laden CCME--five days before the CFO resigned and NASDAQ froze all trading. See, for a link to a comprehensive, well-researched article about these Chinese mobster vehicles.

Pete from CA posted over 3 years ago:

Great article, Mark, as usual.
To remove emotions with their poor and now I learn excessive trading decisions from my life what I have finally done is to subscribe to and follow The Prudent Speculator. It has been very successful for many years. Some of its stocks have been held for 25 years. Its whole universe of stocks has returned, IAW Mark, the best non-risk adjusted returns against the other letters over what, 5, 10, 25 years. About 70% of their investments have been successful, plenty good enough for me.

Alexander from MA posted over 2 years ago:

You are absolutely right. In most cases shortly after i run out of patience the stock goes up.

Alexander from MA posted over 2 years ago:

You are absolutely right. In most cases shortly after i run out of patience the stock goes up.

Alexander from MA posted over 2 years ago:

You are absolutely right. In most cases shortly after i run out of patience the stock goes up.

Shane from TN posted over 2 years ago:

I've noticed similar things in my trading, however I also notice in that the best traders ("Market Wizards" book) mostly seem to advise a willingness to act quickly when getting out of a bad position. They have somehow learned to do what most of apparently can't.

George from PA posted over 2 years ago:

I wonder if all these discussions about "buy-n-hold" vs trading are more about semantics than about making money in the markets...

Perhaps the traders tend to be more focused on chasing the current hot stock or running from the losers while the buy-n-hold'rs tend to be the Alfred E Newmon's saying "What? Me Worry?"

If neither are employing defensive, opportunistic investing, they are ignoring the volitile aspects of today's markets.

For myself, I tend to apply both tactics in a way that (I hope) will tilt the odds in my favor. I neither try for the big gain -- but I try to avoid the big loss as well...

Buddha had it right: "Take the middle road"

Tom from PA posted over 2 years ago:

Unfortunately, I'm the classic case that stayed in the market when it was going down until I could't take it amy longer, then sold. Only to stay out too long when it went back up and miss most of the early gains leaving me way under where I should be. So your article hits home.

Dan from TX posted over 2 years ago:

I just talked to my broker and he wanted to know why I had done so little trading. I told him that the last time we talked he only wanted to talk about balancing Simon Properties. I had made more by keeping Simon than I felt I would have on another unknown stock. I am an eighty four year old investor.

Michael from NY posted over 2 years ago:

It is easy to confuse luck for brains when judging investing results. The beginner investor may be lucky. Later,luck runs out and the portfolio value sinks. Increasingly I like rules to buy and sell on. If the rules set are on good fundamental and technical criteria, adhered to, trades should be few and far between. For the power of compounding to work, it is best to hold stocks for a long time and reinvest dividends to buy more shares. Rebalancing is done infrequently and only after thresholds met. Keeping costs low by keeping commissions low important. So are keeping managed fund fees low by investing in funds with low commissions and no loads. Patience is a virtue and seemingly one of the few values an investor can add to management of their portfolios. There is no doubt (in my mind) that intuition plays a role. One can know intuitively when a stock is low priced or over priced. Intuition applied has helped me avoid two big market sell offs by taking profits before they were taken from me. Investing is more than buy and hold strategy. Consider the result of owning the S&P500 for more than a decade when it trades lower now. Mark Hulbert is spot on about keeping trades down. Frequent trades shifts too much emphasis on the here and now and too little on the long term.

Walter from PA posted over 2 years ago:

I have long been a fan of the finally retired but never to be forgotten John Bogle of Vanguard who has made similar remarks regarding investments in broadly based bond and stock index funds. Thank goodness for such people and for the positive observations expressed in this current article by Hulbert.

Nancy & barry from FL posted over 2 years ago:

You really do need to do your weeding, to have a good investment garden. Why hold a stock whose management has made poor business decisons and whose value is tanking?

James from TX posted over 2 years ago:

If you never take profits, you will never have any----

Werner from PA posted over 2 years ago:

It is well known that investing in equities depends about 80% on the market and 20% on stock selection. Perhaps one should not spend so much time on the latter, but analyze the market, which is a science all by itself. Do not fall for all the histeria of the media.

Michael from CA posted over 2 years ago:

I have always subscribed to the philosophy advocated by Bill O'Neill who publishes the Investors Business Daily. His system of CANSLIM and his system of stock evaluation seems to work for me. He advocates selling a stock if it looses 8% after purchase.Of course this says one has to catch a stock just at breakout or you will be loosing money in fees.
This is an excellent article. As always Mark always does a great job!
I have striven to beat the S&P 500 year after year, with a goal of 20% return each year.

Nancy from WA posted 10 months ago:

We are still stuck in a bygone era of investor education as evidenced by this author's lack of understanding of current technologies and liquid markets. I would ask Mr. Hulbert a very simple question: if trading frequently is so bad, why then are Casinos so profitable? They don't ask me how big my bets are, they all want to know how often I come to Vegas.

Paul from NY posted 10 months ago:

Nancy, you answered your own question. Trading frequently in Vegas *is* bad... for the gambler. That is why casinos encourage frequent trading... er, I mean betting. The house often has a very slim edge over the gambler, and although anyone can go on a hot streak for a little while, the casino knows that the longer the gambler plays the more the odds begin to tilt in the house's favor. That is why they offer free rooms to big winners: to keep them at the casino longer so they are more likely to gamble their winnings back into the casino's hands.

Shane from TN posted 10 months ago:

re: "If you never take profits, you will never have any----"

seriously? I guess it could also be said "If you never take losses, you will never have any---"

John Duguid from NJ posted 10 months ago:

The stock screens at AAII are turned over monthly. What happens to the performance of those screens if they are frozen or at least traded annually?

As it is, if one uses one of the discount brokers (Schwab, Fidelity or Ameritrade) to employ one of the screening strategies using monthly turnover, the transactional drag would be enormous until one was willing to spend tens-of-thousands per stock within the portfolio. For example, if one spent $500 per investment and flipped that every month at a transaction cost of $8.95 per order (one buy and sell order each month), the investor would be subject to a 3.6% monthly or 43% annualized transactional drag. That annualized drag declines to 2.1% if one increases the investment to $10,000 per stock. Still, that drag adds up when compounding over a 30 year period. Then there is the taxes on any gains left over....

Jean Henrich from IL posted 10 months ago:

John Duguid,
We ran an article in Computerized Investing in 2005 that examined the effect of using quarterly or semiannual holding periods for the stock screens.
-Jean at AAII

You need to log in as a registered AAII user before commenting.
Create an account

Log In