NEW YORK (Money Magazine) - Trading stocks is easy and fun, right? But frequent traders earn less than buy-and-hold investors, and they have dramatically higher costs, as Patrick James learned the hard way.
A cardiovascular technician from Shreveport, La., James was bitten by the online-trading bug but good in 1999. He opened an online brokerage account with TD Waterhouse and started trading at least three times a week, sometimes more.
Looking back at his records recently, James, 51, found instances when he swapped in and out of the same stock five times in two days.
"Whenever I was sitting around the house, I was at the computer," he recalls. At $12 a pop, the transactions seemed cheap. And he was making money, at first.
By the end of 2001, though, he was down $16,000 on his stocks and had shelled out nearly $10,000 in commissions. "It really depressed me to see how much I'd spent," he says today.
Get it right
The most frenetic traders earn only 69 percent of the market's return, according to Harrison Hong of the Bendheim Center, so if you invest in individual stocks, trade infrequently.
If you're a fund investor, seek out portfolios with expenses that run below 1 percent of assets. You'll find the expense ratio listed in the first few pages of the fund's prospectus, or you can scan expenses for the entire fund universe using the mutual fund screener here.
Why bother? According to Hong, your best chance of owning an equity fund that lands in the top 25 percent of performers over the long run is to buy one that has expenses in the bottom 25 percent.
James, after realizing how much he's frittered away on commissions, has made his own resolution -- to invest exclusively in index funds that have rock-bottom expenses.
"The balance in my 401(k) is now creeping up fairly quickly," he says. "And I'm not spending money on trading -- so I'm not just getting ahead, I'm staying ahead."
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