Image Credit: Christophe Vorlet
By Jason Zweig |10:15 am ET Apr. 10, 2015
Have investors finally started to get their hyperactivity under control?
According to the New York Stock Exchange, annualized turnover—the rate at which stocks are bought and sold—is down to 63% from a high of 110% in 2010. With a 100% annual turnover rate equal to a holding period of one year, a 63% rate implies that investors are holding the average NYSE stock for 19 months at a time, up from an average of 11 months five years ago. Meanwhile, the investment-research firm Morningstar calculates that portfolio turnover at U.S. stock mutual funds is down to 66% from 75% in 2010.
But these numbers don’t tell the full story. Far from growing more patient, investors appear to be getting twitchier. And now more than ever, trying to outrace Wall Street at its game of trading ever faster is folly.
Consider the NYSE turnover figures, which cover only those stocks listed and traded there. Many of the same stocks are also traded elsewhere; about three-quarters of their total volume occurs on other exchanges and trading platforms.
Including trades on all marketplaces, the annual turnover rate in U.S. stocks is running at 307% so far this year, up from 303% in 2014, reckons Ana Avramovic, a director of trading strategy at Credit Suisse in New York. That is down from the peak turnover rate of 481% in 2009, but it amounts to an average holding period of only 17 weeks.
And that figure doesn’t include exchange-traded funds, which get flung around like hot potatoes. According to John Bogle, founder of the Vanguard Group, the 20 largest ETFs were traded last year at an average turnover rate of 1,244%. That includes activity by individual and institutional investors as well as high-frequency traders who rapidly buy and sell by computer. A 1,244% turnover rate implies a holding period of 29 days.
What’s more, the decline in turnover among mutual funds is unlikely to be a sign that portfolio managers are becoming more patient. Rather, it is a statistical quirk.
Turnover at a mutual fund is calculated by dividing the lesser of its purchases or sales of securities by its total net assets. Investors have been withdrawing money from the average U.S. stock mutual fund for years. But the bull market that began in 2009 has boosted the value of mutual funds’ holdings faster than investors’ withdrawals can shrink them.
Thus the reported turnover rate appears to have fallen not because portfolio managers are trading less but rather because the stock market has gone up so much, says Larry Friend, former chief accountant at the Securities and Exchange Commission’s division of investment management.
This isn’t the first period in which turnover has been high, and it won’t be the last.
In one earlier speculative boom, according to the NYSE, turnover peaked at an annual rate of 319% in 1901 and averaged 204% annually in the first decade of the 20th century. It rose again during the Roaring ’20s, then collapsed after the crash of 1929. It has been rising since the early 1980s.
A recent article in Nature, the scientific journal, reported that the incidence of myopia has doubled in recent decades. With humans spending the better parts of their lives focusing on computer screens and smartphones, 2.5 billion people could be nearsighted world-wide by the end of the decade. Myopia, the article reported, is “reaching epidemic proportions.”
In my opinion, physical myopia and financial myopia might well be related. Psychologists have shown that people who can focus their minds on more-distant objects tend to have greater self-control and a heightened ability to defer gratification.
Studies of individual and institutional investors in the U.S. and elsewhere have found that those who trade the least earn the most—partly because more trading jacks up taxes and brokerage costs, and partly because people have a nasty habit of buying what is hot right before it goes cold and selling what is cold just before it turns hot.
Individual investors are often told by brokerage firms and investment websites that the universal spread of trading technology means that they can beat the Wall Street pros at their own game.
But you squander your greatest advantage as an investor if you try to win a high-speed race that even most professionals lose.
“Time arbitrage”—the ability to invest on a longer horizon than most other people—is harder than ever for many professional investors, who are compelled to measure whether they are beating the market this year, this month, this week, this day, this hour, this minute.
On the other hand, you are free to trade only when absolutely necessary, which could be next to never. You are also free to measure your own performance against goals of your choosing. Set them as far into the future as you can and give them vivid names like “Retirement on Waikiki” or “Graduate School for Grandchildren”; research has shown that “labeling” your future spending needs can be a powerful motivator for setting money aside and keeping it invested.
As Warren Buffett wrote in 1991, “the stock market serves as a relocation center at which money is moved from the active to the patient.”
Let the rest of the world grow ever more myopic. In the long run, he who trades the least will end up with the most.
Source: The Wall Street Journal