COMMENT
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 of uncertainty.
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.
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.
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 that time.
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.
The writer is a Reuters columnist
