Activity Doesn’t Equal Productivity: Why Less Trading is Often Better Trading

In the 1960s, one of the most famous psychology experiments in history was conducted by Stanford University researcher Michael Mischel…and it involved marshmallows. In his study, Dr. Mischel invited a group of four year olds to take a marshmallow. But, he propositioned, if the four year olds were willing to wait while he ran a quick errand, they could have two marshmallows when he returned. He left the room and came back in about fifteen to twenty minutes. Some of the children had eaten their marshmallows, while others had waited patiently to receive two marshmallows.

Over a decade later, Dr. Mischel revisited the achievement levels of all the kids from the group. What he found was astonishing. The children who had not waited for two marshmallows were found to be much less successful. They were more disruptive, more distracted, and less self-confident–and scored over 200 points lower on SAT scores. The children who had waited for two marshmallows–instead of instantly gratifying themselves with one–were more positive, more resilient, more goal-oriented and, of course, they performed better on the SAT. In other words, for both groups of children, the second marshmallow became a manifestation of how they approached everything else in life. Were they willing to wait, or did they opt for the shortcut?

Since the 1960s, we’ve made ourselves a lot busier. The mass adoption of Internet-based technologies has brought us into an always-on world. We are able to do more in less time than we ever have before in human history. But, just because we are doing more, that doesn’t necessarily mean we are accomplishing more. Sometimes, it seems we’ve forgotten how to wait. We’ve forgotten how to be patient. We’ve forgotten how to think about a situation before rushing into it. Perhaps this over-eagerness is manifest nowhere else more so than it is in the world of investing.

Are you aware of the strategy of your mutual fund manager? Whether you are aware of it or not, your mutual fund manager may be excessively trading stocks inside of your fund. The problem with frequent trading is that costs are incurred with each transaction. If trading is conducted with each micro-fluctuation of the market, you are going to be losing money in those transaction costs. More often than not, holding off on a trade until the market corrects itself is a safer and steadier way to make money. Active management is really hyperactive management.

In the end, I think it’s safe to say that we’re all better off with two marshmallows instead of one. All we really need is to develop the patience and discipline to wait. When it comes to trading, high frequency means high cost. If we aren’t careful about how our funds are being managed, we may not end up with any marshmallows at all. If you need help understanding the appropriate balance in making trades in your portfolio, please feel free to reach out to us for a free consultation. We want to help you achieve the life we believe you are a capable of achieving. With a little guidance, the rewards of discipline are well within your reach.