Active trading can lead to high costs and poor returns from "summary" of Random Walk Guide To Investing by Burton G Malkiel
Active trading, or frequent buying and selling of securities, is a popular strategy among investors looking to outperform the market. However, this approach often comes with high costs and disappointing returns. The costs associated with active trading can quickly add up, eating into potential profits and eroding overall returns. One of the primary costs of active trading is commissions, which are fees charged by brokers for executing trades. These fees can vary depending on the broker and the size of the trade, but they can quickly accumulate, especially for investors who trade frequently. In addition to commissions, active traders may also incur other costs such as bid-ask spreads, which are the difference between the buying and selling prices of a security. Another factor that can contribute to poor returns from active trading is the impact of taxes. When investors buy and sell securities frequently, they may trigger capital gains taxes, which can reduce their overall returns. In addition, frequent trading can also lead to higher short-term capital gains tax rates, further eating into potential profits. Beyond the financial costs, active trading can also be detrimental to investment performance. Research has shown that the more frequently investors trade, the lower their returns tend to be. This is because active trading can lead to higher levels of emotional decision-making, which can cloud judgment and lead to impulsive and poorly thought-out investment decisions.- While active trading may seem like an attractive strategy for investors looking to beat the market, it often leads to high costs and poor returns. By taking a more passive approach to investing and focusing on long-term goals, investors can potentially achieve better results with lower costs and less stress.
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