The Hidden Cost of Clicking

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Investing is a rollercoaster ride.

One day your portfolio is at all-time highs and the next? Well, it plummets and you begin to worry.

You act on your impulse and buy/sell/trade.

But remaining objective and taking no action typically results in better outcomes.

Wait…what? How?

Frequent trading could be eroding your financial future. We’ll explore strategies to navigate investment turbulence, examine the psychology behind our actions and offer some tips for staying calm.

And your retirement nest egg may just thank you.

What’s Overtrading?

Overtrading refers to the excessive buying and selling of financial instruments, like stocks or ETFs.

People often overtrade after significant losses or during losing streaks, attempting to recoup capital or seek some sort of revenge on the market.

Studies have shown that this behavior ultimately leads to poor performance as the value and frequency of their trades attempt to make up for lost profits.

So what if I trade a few more times? It can’t hurt, right?

Wrong.

1. Financial Impact

Overtrading can erode investment returns due to increased transaction costs. Even if your brokerage firm offers no-fee transactions, frequent trading eats away at potential gains, especially when the market is volatile. Investors who overtrade may find their nest egg shrinking rather than growing.

Fidelity has an excellent comparison of an investor who stays invested versus one who misses out on the best market gains in a multi-year period.

By staying invested throughout all calendar days, you stand to gain more than $400,000 than those who missed the 5 best days of each year (over a 42-year period on a $10,000 initial investment, as noted above).

Now that’s some serious savings - by doing nothing once invested.

2. Emotional Toll

Overtrading often stems from emotional reactions to market fluctuations. Fear, greed, and impatience drive traders to make impulsive decisions. Unfortunately, these emotional responses rarely lead to successful outcomes. Patience and discipline are essential for long-term success.

Practical Tips to Avoid Overtrading

1. Set Clear Investment Goals: Define your objectives and time horizon. Understand why you’re investing and what you hope to achieve. This clarity will help you stay focused and avoid unnecessary trades.

2. Monitor Your Portfolio Once-in-a-while: It’s essential to stay informed, but avoid obsessively checking your portfolio. Frequent monitoring can lead to impulsive decisions. Instead, review your investments periodically (e.g., quarterly) to rebalance if necessary.

3. Educate Yourself: Learn about behavioral finance, risk management, and investment strategies. Understanding market cycles and historical trends can reduce emotional reactions.

4. Patience! Remember that successful investing is a marathon, not a sprint. Trust in the power of compounding and resist the urge to chase short-term gains.

Being patient with your investments pays off. Avoid the temptation to overtrade, protect your nest egg, and let time work in your favor. Whether you’re saving for retirement or other financial goals, discipline and a long-term perspective are your allies.

Remember: It’s not about how often you trade; it’s about making informed decisions that align with your financial objectives.

Sitting on your hands is tough.

But trying to control a rollercoaster is tougher.

Save On,

Chris