Accidental Economist
Behavioral investing guru Terry Odean's winding path to finance
In the two years since, he has teased out of his data a half-dozen fascinating and important conclusions. He found, for example, that on average the investors he studied didn't buy and hold. Instead, they traded too much. Worse, they tended to sell their winners and hold on to their losers. In all, Odean concludes, individual investors appear to be overconfident about their abilities to pick stocks and time the market, and that hurts their profits.
Although he concedes many academics look down on those whose names show up regularly in the popular press, Odean happily gives interviews and advice. "I want to be like the dentist, and put myself out of business" by helping investors to trade smarter, he says.
While it may be possible to make money from his insights, Odean recommends that amateurs steer clear of regular trading. Most investors would do best to do what he does: simply buy and hold index funds. (Some mutual funds, however, are doing well by applying behavioral finance principles [chart].)
More important, he advises, investors shouldn't worry about returns, because money doesn't buy happiness. The best investment he ever made, Odean notes, wasn't a stock or bond. It was his Ph.D.
Good advice confirmed
Buying and holding is the surest way to maximize your returns, a point reinforced by Barber and Odean's analysis of 78,000 accounts at a discount trading firm.
[Data for chart are not available.]
Source: ("Trading is Hazardous to Your Wealth" by Brad M. Barber and Terrance Odean
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