VANCOUVER – The sudden surge in the price of GameStop shares and other underperforming stocks over the past month has made some people millionaires, but it has plagued many more people with losses.
As the investment forums on Reddit and the growing popularity of commission-free stock trading platforms encourage more people to try and beat the market by choosing the right investments at the right time, new research from the Sauder School of Business of UBC calls for caution.
The study, called “The volatility of returns for equity investors, Builds on previous research that has shown that frequent buying and selling tends to result in lower returns than just buying and holding.
In addition to the tendency of this “time the market” strategy to lead to lower returns, researchers at UBC found that such behavior also increases the volatility of a portfolio.
The study looked at data from the New York Stock Exchange, the US Stock Exchange and the Nasdaq, calculating “dollar-weighted” returns to capture the effects of market volatility over time.
Dollar-weighted returns take into account both the performance of a given stock or portfolio and the timing of investments in it.
For example, if you inject $ 1000 today, it has a very different implication than if you inject $ 1000 two months from today, as market conditions are very different and stock prices are different, said study co-author and assistant professor Dr. Xin Zheng, said in a press release.
Zheng and his co-author, Ilia D. Dichev of Emory University, found significant differences in volatility by examining dollar-weighted returns versus “buy and hold” returns, i.e. simply say the change in the price of a stock over a period of time.
Over a 20-year investment period, the dollar weighted returns showed 50% higher volatility than the buy and hold returns. Over 30 years, the difference was even greater, with dollar-weighted returns 71% more volatile than buy and hold returns.
While this finding highlights the significant risks investors take when buying and selling frequently, it is not only these “active investors” who are affected by the higher volatility.
At the beginning of their article, the researchers ask the reader to consider an investor starting from scratch and regularly adding to an investment portfolio over a 20-year period. If the returns are constant for the first 10 years and then oscillate more sharply in the 10 seconds, the investor will see greater overall volatility over the two decades, because he invested more money during the period. more volatile.
Zheng’s advice to retail investors is to “trade as little as possible.”
“Investors shouldn’t be on the phone all the time,” he said. “They can watch as much as they want, but trading is expensive and this contributes to the overall market volatility, which will affect their own stocks.”
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