Wednesday, June 08, 2011

“Stop Me Before I Trade Again!”

Many men (and some women) with millions to invest are too flighty. If they're not switiching advisers on a whim, they're trading too often for their own good.

A Barclays Wealth study spotlights this "trading paradox." Some wealthy investors feel compelled to keep buying and selling even though they know their wealth suffers as a consequence.
“This trading paradox exists, to one degree or another, everywhere in the world,” Greg B. Davies, the head of behavioral and quantitative finance at Barclays Wealth, said.…. “Not everyone is prone to frequent trading, but among those who feel that they must trade frequently to do well, there is a substantial proportion who are troubled by their behavior.” 
A U.S. News column notes that two groups of wealthy investors tend to behave more rationally:
For older investors and retirees, the report found substantial improvement in investment decisions as people aged. Compared with younger investors, older investors were much less likely to trade too often, to try to time the market, or base investments on short-term considerations. They were also more satisfied with their financial situation.

… women are better long-term investors than men. Men tend to take more risks and are more likely to favor frequent trading and efforts to time the market. "Women tend to have lower composure and a greater desire for financial self-control, which is associated with a desire to use self-control strategies," the report said. "Women are also more likely to believe that these strategies are effective." As a consequence, women tended to trade less and earn higher returns over time.
Could that be why the clients of prudent trust institutions so often turn out to be retirees and/or female?

Related post: What Investors Need vs. What Investors Want

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