Like a horror-show sequel released just in time for Halloween, they’re baaa-aack: It’s the Return of the Day Traders.
Just this weekend, the Wall Street Journal reported record numbers of individuals are opening “do it yourself” accounts at popular brokerage houses. More than 3 million new accounts have been set up on trading app Robinhood alone.
Will this batch of traders fare any better than their disgraced predecessors?
Temptations Always Abound…
Not likely, but we understand the draw—especially for those unacquainted with market history.
Back in the 1990s, investors were drooling over anything tech, aggressively trading on superstars like America Online, Microsoft, and (infamously) MCI WorldCom and Enron.
I remember those heady days.
Buoyed by their “success,” several of my college buddies seriously considered careers as full-time day traders. After dabbling in fast-rising markets where it was (briefly) hard to lose, they lost sight of a stark reality: While a rising tide lifts all boats, it does the same in reverse when it heads back out.
When the tech bubble inevitably burst, I had just landed my first job as a young investment analyst. Focused on learning the finer points of asset allocation and portfolio theory, I hadn’t a clue how to trade individual stocks. My would-be day trader friends couldn’t help—sensibly, they’d moved on to other jobs.
…But the Odds Remain as Tall as Ever
These days, Microsoft and the lot have been supplanted by the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), Tesla, Zoom, and a host of other supposed “sure bets.”
The particulars vary, but there are always fresh contenders on a seemingly unstoppable rise—and a fresh batch of investors willing to believe they have what it takes to pick tomorrow’s winning stocks.
These wide-eyed investors face long odds, indeed.
Research has shown most day traders lose money, with online personal finance company NerdWallet reporting recently just 1% of traders consistently get better returns than a low-cost index fund.
In a landmark 2000 paper, behavioral finance professors Brad Barber and Terrance Odean found that individual investors pay a tremendous performance penalty for active trading. During the period studied, those trading the most earned an annual return of 11.4%, while the market returned 17.9%.
Aggressive stock-picking fund managers don’t fare much better. In their research, professors Eugene Fama and Ken French found that just 3% of professional fund managers produce results that indicate they have sufficient skill to cover their costs.
A sensible person might conclude they don’t have a prayer of outperforming the market. So why do investors keep trying?
Overly Entertaining Apps and Alluring Advertising
Part of the answer lies in new trading apps like Robinhood, which make it easy and exciting to abandon careful planning and solid portfolio management to speculate on breaking news and recent winners.
The apps’ clean designs, bells and whistles, and “just click here” appeal make it seem cheaper, easier, and more fun than ever to pretend you’re investing like a pro—or more accurately, gambling like one.
No wonder they’re attracting a new generation who has grown up on a diet of similarly designed gaming apps, now treating the stock market like its entertainment.
If you’re able to avoid the likes of Robinhood, there’s still a proliferation of TV and social media clickbait touting how easy it is to own a slice of today’s most popular picks.
Even Charles Schwab has been in on the game lately, advertising its new Stock Slices™: “Now anyone can own any of America’s leading companies in the S&P 500 for as little as $5.”
Well, isn’t that just dandy. The truth is, investors have long been able to do that already—and much more sensibly—with a low-cost index fund appropriate to their financial plan.
Invest, Don’t Speculate
Bottom line, regardless of age or acumen, you’re best off sticking to a low-cost, globally diversified portfolio aligned with your well-formulated plan.
Granted, this approach is unlikely to deliver the eye-popping returns some clear-with-the-benefit-of-hindsight stocks have delivered recently. But neither will a well-diversified portfolio leave you reeling, when you realize your return expectations were never grounded in reality to begin with.
Day trading isn’t investing, it’s speculating. After all, if day traders had any staying power, you’d be able to instantly name the most famous one of all.
Who is it?
I don’t know, either.