That's the conclusion of an important new study by Brad M. Barber and Terrance Odean, professors at the graduate school of management at the University of California at Davis. Such excessive trading helps explain why both individual investors and mutual funds generally underperform the market. Barber and Odean studied the trading activity of 78,000 households that used one large discount broker between February 1991 and December 1996. These figures do not account for taxes, which could claim up to a third of the gains for those generating mostly short-term profits in taxable accounts.
Beta is dubious proxy for risk.
Still, if one assumes it's useful, the risk-adjusted net returns of the average investor underperformed the market index by 4 percentage points annually. So for the study period, an investor could have done better with an index fund even while enduring far lower risks to capture that performance. The crucial difference in performance was not so much stock selection as turnover. And transaction costs weren't the only problem. As Odean notes in a related paper , investors sell profitable investments twice as often as unprofitable ones.