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.
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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. 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.
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.
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