In defence of inactivity – why frequent trading and trend chasing can harm long-term investment performance
Key points
- Investors can be prone to overactivity, responding to every market movement and chasing emerging trends, at the expense of their long-term strategy.
- On average, investors underperform the very same funds they own, and the more they trade, the worse they perform relative to the fund itself.
- By delegating portfolio maintenance to a professional manager, this could go some way towards removing the potential for unnecessary trading.
- The Wealth Club Portfolio Service could provide a sensible, long-term alternative to self-management for those who don’t need advice.
With a relentless barrage of information affecting markets every day, prices can shift wildly, often creating an urge to react to every fluctuation. It is understandable that many investors believe trying to anticipate these market oscillations will ultimately yield greater overall returns, leading to an adjustment of their holdings at the first sign of a market move.
This innate emotional response to volatility often leads to mistiming the market. This is why some investors are more prone to panic during market selloffs, or susceptible to overenthusiasm during bull runs in exciting sectors.
Yet by fighting the temptation to respond to every market movement and instead implementing a well-diversified strategy that can be comfortably held for an extended period, you could actually be far better off in the long run.
Important: The information on this website is for experienced investors. It is not a personal recommendation to buy, sell or hold any investment. The views expressed below on portfolio composition are not personal financial advice. If you’re unsure, please seek advice. The Wealth Club Managed Portfolios are for the long term and can fall as well as rise in value: returns are not guaranteed.
The dangers of overactivity
This risk of overactivity is also prevalent even when holding the same position for an extended period, as many self-managed investors can find themselves buying and selling the same fund as performance deviates.
It has been estimated that over the decade to the end of 2024, the average US open-ended and exchange traded fund earned an aggregate total annual return of 8.2%, assuming an initial lump sum purchase and continued investment for the entire period. However, the average investor who held these funds but timed their buys and sells, rather than holding continuously, generated an annual return of 7.0%.
This gap in performance amounts to nearly 15% of the fund’s total performance being missed by investors due to overactivity.
Yet this was just the average. The performance gap was wider in specialist equity funds, where investors underperformed their funds by an average of 1.5% annually, missing nearly 20% of their fund’s return.
In these cases, investors would routinely buy into equity funds after a period of sustained outperformance, swept up in prevailing market optimism, only to sell on the heels of a severe drawdown. This cycle is liable to occur many times over an extended investment period, leading some investors to inadvertently buy high and sell low repeatedly, steadily eroding returns.
Worse still, the impact of this unnecessary trading may not be noticed at first, especially if the funds themselves are performing well. However, when compared with those who held the fund continuously, the performance gap will be evident.
US Open-End Funds and ETFs: annual investor returns vs. total returns over 10 years
Source: Morningstar. Data as at 31/12/2024. Excludes “commodities” category group and funds of funds. Past performance is not a guide to the future.
Trend chasing
The same behavioural factors could also manifest as an urge to abandon long-term positions to jump on the latest trend.
History is littered with cases of investors chasing exciting trends, often abandoning long-term diversified strategies in the interim, only to suffer persistent underperformance.
Fresh in the mind will be the dotcom bubble of the late 1990s, where investors aggressively purchased telecommunications and internet infrastructure companies, believing in the potential of a new digital economy.
This speculative fervour pushed valuations well past traditional levels, and the market reversed sharply, delivering losses for those still with exposure to the sector. For example, the shares of Cisco, the networking infrastructure provider that became the world’s largest company at the height of the bubble, took 25 years to get back to the dotcom bubble’s highs.
Even in exceptional cases when an underlying technological innovation may justify swarming to an emerging sector, the investment returns generated by continually chasing the next big trend rarely reward the initial speculation.
Cisco Systems – Adjusted closing share price (USD)
Source: Morningstar, 16/02/1990–28/02/2026. The chart shows the adjusted closing share price (accounting for share splits) for Cisco Systems. The chart does not include the impact of any dividend payments. Past performance is not a guide to the future. The returns for UK investors will be affected by currency fluctuations.
The art of delegation
To successfully quell this emotional response to market tumult and resist the temptation to chase endless new trends, a solution could be to take a step back.
By focusing on maintaining a well-diversified portfolio, this could provide a degree of insulation against dramatic market conditions and help to cultivate a longer-term view of one’s investments.
Furthermore, a portfolio that is inherently more resilient could allow you to be more at ease with the market, with the temptation to overtrade diminishing when your investments are less vulnerable to market swings.
For instance, by holding a diverse array of global assets, you are less likely to experience disproportionate emotional pain when a single sector or geography falls out of favour in the short term. This could also help to ease the temptation to chase the latest speculative fad, as the portfolio may already include exposure to these emerging themes through its broad allocation.
This can be demonstrated by comparing the performance gap experienced by investors who held US “allocation” funds with those who held traditional equity funds or just the average fund. US allocation funds are broadly equivalent to UK managed funds, such as target-date strategies and multi-asset allocation vehicles. These funds maintain broad, highly diversified portfolios that are regularly rebalanced and designed for a set-and-forget holding approach, aiming to provide steady, but not stellar, returns.
Investor return gap for different fund types
Source: Morningstar. Data as at 31/12/2024. Excludes "commodities" category group. The “average” fund figures exclude funds of funds to avoid double-counting. Gap numbers may not match differences in returns because of rounding.
Investors in these funds were far less likely to actively buy and sell, even during periods of market volatility, thereby allowing them to capture 97% of the funds' aggregate total returns over the period. This is a significant reduction in return lag compared with investors who missed out on 15% of performance for the average US open ended and ETF fund, and 20% for specialist equity funds.
Yet this shouldn’t be considered unique to the funds themselves, rather it demonstrates how funds that obviate the need for investors to take any manual action in response to market moves can help them to avoid mistimed entries and exits.
A streamlined alternative?
To that end, some investors may find it valuable to delegate the tasks of asset allocation and portfolio rebalancing to a professional manager. This could go some way towards removing the challenge of finding the middle ground between overactivity and maintaining sufficient vigilance to keep your portfolio comfortably positioned.
With this in mind, the Wealth Club Portfolio Service has been developed as a streamlined solution, exclusively for high net worth investors, providing a sensible, long-term alternative to self-management for those who don’t need advice.
Our service aims to remove the burden of deciding when to rebalance, which sectors to trim, or how to navigate a sudden market move, and comprises five managed portfolios across the risk-reward spectrum. Each portfolio incorporates thirty to forty-five carefully selected funds, offering varying proportions of broad exposure to global equities, bonds, and private assets. However, any investment in financial markets involves accepting a degree of risk, and returns are never guaranteed.
Across all of our portfolios, trading is kept to a minimum due to the importance of maintaining conviction in owning funds through short-term performance volatility. Additionally, this solution operates on a non-advised basis, avoiding the charges investors incur when engaging a financial adviser, allowing the Portfolio Service to be priced similarly to a DIY investing platform. As the service does not provide personal recommendations, investors are responsible for choosing the portfolio that they feel is right for them and ensuring it aligns with their financial circumstances and capacity for loss.
A sensible long-term home for your wealth?
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy, sell or hold any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
Alex Davies
Chief Executive
Alex was a board director at Hargreaves Lansdown, where he worked for 15 years. He was responsible for building Hargreaves Lansdown into the biggest direct-to-consumer SIPP provider in the UK with more than 150,000 clients and over £12 billion under management. He is a keen investor with a portfolio of shares, funds, student property, EIS and VCT investments.