Why Hands-Off Investing Pays Off

Study shows those who are prone to inopportune trading often lose out in the end

- Jeff Sommer

Don't do it. Don't touch your investments.

That's the simple, yet hard-to-practice, lesson of a new study of investor behavior by Morningstar, the financial services company. It found that over the last decade, most people hurt themselves by trading. Once they put their money into stock and bond funds, they would have been much better off if they had just left their money alone.

In fact, Morningstar found that, on average, the actual returns of fund investors were significantly less than the posted market returns, a discrepancy explained by poor trading decisions—buying when the market was high and selling when prices were low.

Over extended periods—say, 30 years—this drag on returns produces chilling results: a reduction in the money in an average investor's portfolio of more than 18 per cent, according to Morningstar calculations performed at my request.

"Investors hurt themselves when they are prone to inopportune trading," Mr. Jeffrey Ptak, managing director of Morningstar Research Services, said in a phone conversation. Finding ways of resisting the temptation to buy and sell is critically important.

Be mindful that merely by intervening in your own portfolio, you are taking risks. It is possible, for example, that the current problems will dim in importance when seen from a vantage of a decade or more from now, and that other developments, like artificial intelligence or something we can't even identify yet, will propel the economy more rapidly than most people expect.

The lessons of the markets, and of the latest study, suggest that a humble approach may be wise. It's hard to beat the markets.

FINDINGS