Overconfidence is believing your information and judgement are better than they are. In markets it shows up as trading: the more certain investors feel, the more they buy and sell. Turnover measures how much — the share of a portfolio bought and sold in a year.
Brad Barber and Terrance Odean studied 66,465 US households at a discount broker from 1991 to 1996. The average household turned over 75% of its portfolio a year, and the fifth that traded most earned 11.4% a year after costs, against 17.9% for the market. In a second study, men traded 45% more than women, and trading cut men's net returns by 2.65 percentage points a year against 1.72 for women. Much of that is transaction drag: each trade's costs come off the return, and they add up faster than they feel. The app records every buy and sale you enter on a holding.
US households in the 1990s, when dealing cost more than it does now. The costs of trading haven't gone to zero.
SOURCES
- Barber, B. M. & Odean, T. (2000). Trading is hazardous to your wealth: the common stock investment performance of individual investors. Journal of Finance, 55(2), 773–806.
- Barber, B. M. & Odean, T. (2001). Boys will be boys: gender, overconfidence, and common stock investment. Quarterly Journal of Economics, 116(1), 261–292.
Educational content only. It is not personal financial advice.