A new study shows that attempts to time the market often not only lead to lower returns but to increased volatility as well. This according to a recent article in The Wall Street Journal.
“That is, market timers actually assume much more risk to get those lower returns, compared with investors who simply buy and hold investments.”
The study, from Ilia Dichev of Emory University and Xin Zheng of the University of British Columbia, analyzed the connection between active trading and risk, revealing that although active investors tend to “chase stability” by attempting to minimize volatility in their market timing efforts— “they end up doing the exact opposite.” The researchers found that “the volatility of the actual investor experience is nearly 50% higher than the corresponding volatility of stock returns” and, further, that the volatility grows over time.
“We’re living through a period of high volatility, both for the world and the financial markets,” the article concludes, adding, “However, one proven way to make your investments less volatile in the new year is to do as little as possible with them.”
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