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The right amount of trading

By Sheyna Steiner · Bankrate.com
Monday, June 4, 2012
Posted: 4 pm ET

Study after study has shown that investors are their own worst enemies. Overconfidence and frequent trading often undo any gains that could have accumulated.

On Friday, the Wall Street Journal reported on a game that allowed teams to see who could produce the best returns through paper trading, or a simulated trading experience.

The simulation was created by Brandes Investment Partners. Not surprisingly, most often the teams that win are those that do the least.

From the WSJ story, "Game changer: Play money teaches real lessons on managing investments:"

Participants in these investing simulations, as in the real world, tend to trade too much, the Brandes officials say. Last month, some teams made 10 trades a round. By contrast, the winning team made a total of just five trades after picking its initial portfolio -- the fewest in the game.

So, when is trading called for?

It's frequently said that individual investors trade too much, but no one believes that applies to them. That goes back to the problem of overconfidence.

But you may be wondering, what is the difference between trading too often and not enough? That depends on one thing: your personal investment plan.

Knowing why you bought the investments in the first place, your expectations for them and how they've performed relative to benchmarks is a great place to begin when analyzing your investments.

An all-too-common mistake is to look at your investment's performance and compare it to whatever the hottest sector or area in the market is lately. To prevent falling for the "grass is always greener" illusion, make sure you're making apples-to-apples comparisons, or in other words, comparing companies that are the same size or same industry or similar mutual funds.

Also, consider the effect fees have on your investments. Mutual funds with very high expense ratios need to provide better returns to lessen the drain on your account. Ditching expensive mutual funds that consistently underperform could be one reason to institute a few well thought out trades.

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Follow me on Twitter @SheynaSteiner.

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