By: Dividend Sensei
You can instantly see the precise value of your holdings at any given second. And since transaction costs are so low, and liquidity, (ability to sell and convert to cash), so high most investors overtrade. And online discount brokerages, while a great thing for lowering commissions, have only made the problem worse. For example in 1975 buying stock might result in a commission of nearly 1% or $100 on a $10,000 purchase. Not surprisingly stock market turnover was 20%. That meant that on average investors owned a position for five years before selling.
Source: St. Louis Federal Reserve
However currently market turnover is 160%, meaning the average position is held just 7.5 months. Note that during the terminal bubble phase of a bull market turnover tends to increase substantially. Just before the previous two crashes turnover hit 192%, and 293%. In other words investors became short-term gamblers and started owning stocks for just three or four months.
Well market studies are very clear, the more you trade the less profit you make. Fidelity did a study of their clients and found that the ones whose portfolios did the best were dead, or at least forgot they had accounts at all. That was because these portfolios literally had zero turnover. The income producing assets they owned were allowed to do their work and appreciated in value over time.
Numerous other studies, including famous ones from Rich Bernstein Advisors and JPMorgan, have all found the same thing. The average investor is absolutely horrible at timing the market, because humans are not wired correctly to be good short-term traders. In fact between 1996 and 2015 the average REIT investor, who bought and held the entire time, would have beaten the market by a significant amount. But the average retail investor got crushed by literally every asset class. They even underperformed some of the lowest inflation in history.