This is fascinating. My pal Larry Swedroe of Buckingham Strategic Wealth looks at the first study of its kind – an online brokerage informed 1500 of its customers about whether or not the trades they were doing added any value. Note that this stands in direct opposition of the goals of online brokerages – to encourage more, not less activity. Brokers are only required to issue statements of positions, balances, activity, etc – not judgments.
But what if they did? Now we know – people are smart and make good decisions when the truth is put in their faces:
The reports showed investors their last year’s returns, costs, their current level of risk and their portfolio diversification. The test lasted 18 months. All the investors in their sample traded heavily, with an average annual turnover of well above 100% and a median turnover of 98%.
It’s important to note that survey participants stated they did not use their account as “play money accounts,” with 72% of participants reporting that the account associated with the survey is their main securities account. Only 3% said they had a short-term investment horizon. The authors found that after receiving the feedback reports:
- Investors trade less
- Investors diversify more
- Investors earn higher risk-adjusted returns
- The effects become stronger over time
There was another interesting result. Prior research has shown that individual investor learning in investment matters is mainly driven through attrition—investors who learn about their inferior investment skills stop trading.
The vast majority of people, by definition, will not be adding value to their own accounts through concentrated bets or extremely high turnover. This isn’t up for debate, it’s a fact.
But now we know how people react when provided concrete, personalized evidence of this. Only the most deluded individual investor would look at this evidence and continue to blue-pill themselves with the fantasy.