1.5 Percent Is A Rounding Error, Right?

The World’s Most Expensive Hobby (Part 4)

Households directly hold a significant percentage of stocks, close to 40% of the U.S. equity market.
But the average household gives up about 1.5% a year in performance through unproductive trading.
Such underperformance can lead to substantial differences over an investment lifetime.

To invest wisely, you need to define a benchmark before you actually make any investment decisions.
Even if you have a benchmark in mind, an active investment philosophy brings a whole host of issues when it comes to tracking investment performance.
These issues ultimately obscure the true performance of active investors, which makes it very difficult to figure out if one is investing prudently or not.
This obscurity is what likely perpetuates an active investing philosophy; however, over time, this can lead sub-optimal investment performance for the average investor.

Investing is all about finding a balance that works for the long run.
Loss aversion can lead to underinvestment, but overconfidence can lead to concentrated bets, and as we’ll explore in this post, overtrading.
According to the research of Barber and Odean, overtrading can cost investors about 7% a year in returns on average. Yikes!

Hobbies can provide lasting benefit by allowing individuals to refocus their efforts away from their careers towards alternative forms of enjoyment.
Nevertheless, active investing as a hobby might not be the best use of one’s free time.
Not only are the chances of adding value from this endeavor very slim, but also, the costs associated with investing unwisely can profoundly impact one’s long-term goals and aspirations.
As an example, most investors often overlook opportunity cost when making investment decisions even though this particular expense can be significant.