by Archie M. Richards, Jr., CFP^®
November 8, 2004

What's the worst thing people do to hurt their stock investment results? No, not choosing lousy stocks. The answer is, trading too much.

In and out, in and out. Whoops, that stock was a lousy pick; gotta get out and buy a better one.

This stock over here has gone up 15 percent; can't claim a profit unless I take it.

A guy on the Internet recommended a stock that's going up big; gotta sell something else to buy it.

Look out, a hotshot on television says the market's heading down. Better raise cash.

In and out, in and out. The market may rise big, but the value of your account is stuck in a rut, or worse.

Trade infrequently. As Warren Buffett put it, you can't produce a baby in one month by getting nine women pregnant.

When you buy a stock, shoot for a double in 5 years. That's years, mind you, not minutes. Nobody knows what the price will do even in the next 6 months.

You say, "What do you mean, 6 months? We ought to know what a stock is going to do tomorrow. After all, tomorrow is just around the corner. Six months is way out there. And 5 years? Yikes! By that time, we could be wiped out by ebola virus!"

Nope, the forces that shape tomorrow's stock market can't be known; it's a complete mystery. With time periods up to a year or so, there's too much static, too much noise. If you buy a stock, count on the darned thing falling for 6 months. If you don't buy it, the little beauty will rise for sure. In the short run, the stock market is like that - ornery. But if you diversify and haven't gone overboard on risk, your portfolio in 5 years or so should give you a nice profit. Go for it. If you get hit with ebola virus, it won't matter anyway.

It costs money to trade, and if you're dealing with a hotshot broker, it costs big. Say you invest $5,000 in a stock, and the commission is $100 (2 percent). The amount actually placed in the stock is $4,900. The price rises by 10 percent to $5,390. You sell, paying another 2 percent ($108). This leaves you with $5,282.

The stock gained 10 percent, but your account gained only 5.6 percent from $5,000 to $5,282. The commission gobbled up almost half of the earnings. Oh sure, if the market rises at 25 percent a year, commissions get lost in the wash. But such a frenetic pace doesn't persist. Perhaps you've noticed.

In addition to the commissions, the difference between what you pay for a stock when you buy it and the lower price if you sell it at the same instant is called the spread. You pay that cost most of the time, usually costing about 0.2 percent. This may not seem like much, but if you trade a lot, it adds up.

Most investors trade far too often. On average, stock prices rise more after people sell than they do before. The worst offenders are guys, especially young, single guys. They get those juices flowing and, man, they want action! In and out, wham, bam, thank you, m'am! Young men like this don't need investing; they need a close encounter of the first kind. But they're less likely to find it if they're poor. Trading stocks is a great way to become poor.

Don't treat investing as entertainment. You buy a stock - great, you did the best you could. Now forget about it for a few years. Let it simmer. Let the people who run the company do the work. Over a period of years, they're busting their tails trying to elevate the company's earnings and push the stock price up. You don't have to do a thing.

Don't cut a hole in the bottom of your wallet. Forget about trading. Go for long-term profits.