(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
Jan 4 When it comes to investing, you may not
actually be your own worst enemy.
Despite ample evidence that individual investors very, very
often get it very wrong, a new study shows that actually paying
attention to stock market holdings pays off.
Looking at brokerage records that show not just buying and
selling but also the amount of time investors spent on their
broker's website doing a variety of activities, the study shows
improved risk-adjusted returns for those who put in the time.
"We show that attention is positively related to investment
performance - both at the portfolio return level as well as the
individual trades level - and provide evidence that the superior
performance of high-attention investors arises because they
behave as momentum traders that purchase stocks early in the
momentum cycle, several months before reversal sets in," Antonio
Gargano of the University of Melbourne and Alberto Rossi of the
University of Maryland write in the study, published in October.
The effect is especially large for large capitalization,
highly followed stocks with a fair amount of volatility: think
about stocks like Facebook, about which there is a large amount
The results are pretty good: for every standard deviation
increase in overall attention investors saw a 7 percent increase
in their Sharpe ratio, a standard measure of risk-adjusted
returns. If you look at potentially more meaningful measures,
such as the amount of time spent on the brokerage's research
pages, the increase in Sharpe ratio rises to 10 percent.
The study looked at a previously unexamined data set: the
brokerage records of 11,000 accounts at an unnamed firm from
January 2013 to June 2014. This allowed for an examination not
just of what a given client traded but how often they logged in,
what kind of content they were exposed to and how long they
spent on given web pages. These were not day traders: the mean
client went 27 days between logins and 40 days between trades.
On days they did log in, however, they were quite active, doing
so almost 11 times on that day for almost 29 minutes.
So much for the oft-offered advice of rebalancing your
accounts once a year and paying no attention otherwise.
Here I should disclose a conflict: several brokerages make
my columns available to clients on their websites as part of
feeds of news and analysis the firms purchase from Reuters.
BETTER OR BENEFICIAL?
This research is striking because the literature on
individual investor performance is not encouraging, nor is the
evidence on the benefits of higher activity.
A study from 2000 found that individuals who traded
frequently had net returns only of about 60 percent of those who
trade infrequently, a result the authors ascribe to the effects
of over-confidence. Indeed, the new study found that while more
attention did help risk-adjusted returns overall this was an
effect that diminished to effectively nothing among the top
quintile of attention payers. (here%20current%20versions/individual_investor_performance_final.pdf)
While measuring mutual fund investors rather than brokerage
clients, a study by consultants DALBAR of individual investors
has famously shown that the typical mutual fund investor is a
master at timing the market badly. The 2016 study found that the
average equity mutual fund investor has made just 3.52 percent
annualized over the past 20 years, against 8.19 percent over the
same period for the S&P 500.
Some caveats - big ones - are in order. The study doesn't
measure whether those involved did better than they would have
if they'd simply held index funds. What we can say is that if
you are going to have a brokerage account it seems you will do
better if you spend more time managing it.
And the positive impact from attention on given trades only
persists for about five months, meaning that a high-attention
market-beating strategy presumably depends on stringing together
good trades over time. It may well be that those involved only
identified opportunities every so often. The supply of good
momentum trades, in other words, may be less than that needed to
make the whole enterprise worthwhile.
The time period studied, the 18 months from Jan. 1, 2013,
may also have affected results. Stocks during this period were
floating upwards with fairly metronomic regularity, with the S&P
500 advancing by more than 35 percent over the period. What's
more, volatility was low and generally stayed stable. The Vix
index of volatility only went above 20 once, briefly, during
In other words, this was a good time to pursue a momentum
strategy of buying what was going up. It also was a time without
huge drawdowns of the kind when nervous and over-active
individual investors commonly shoot themselves in the foot.
Attention does pay, it seems, but we still don't know if the
wages are sufficient.
(Editing by James Dalgleish)