Review: How trading ETFs may lose you money—especially if you’re a guy

Trading is bad for your wealth. The data is monstrously clear on this. This article singles out ETFs, but really it’s anything.

Yes, ETFs have made it easier to make bets on what different pieces of the market will do, but it’s not like anyone was lacking in ways to trade before ETFs came along. The blame is not on the financial engineers for this one.

Even leaving aside the fact that market timing is impossible, trading isn’t free. You’ve got your direct trading costs – what you pay to actually place the trade – as well as the bid-ask spread. That’s the difference between what you can buy and sell a security for. And as an individual investor, this is not your friend.

I love when the media includes references to academic research. It doesn’t happen too often, so I always like to highlight it.

In this article, the author talks about Terrence Odean’s research into trading behavior. What he finds is that trading is basically evidence of overconfidence. And shockingly (but not really), men are more overconfident than women – with single men the most overconfident of them all.

To give an idea of the scale of the issue, in his study, men traded about 45% more than women. And because of this, men lost almost a percent more to their trading activity than women. That’s not to say women weren’t hurting themselves – they just weren’t hurting themselves as bad as the men were. On average, trading reduced men’s returns by 2.65% per year and women’s by 1.72% per year.

For more on how you should actually be approaching investing, read our ebook, A Minimalist's Guide to Understanding Financial Markets

 

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