COLLEGE PARK, Md. – Dec. 29, 2016 – Is it better to monitor your investments constantly or to ignore the market’s twists and turns and leave your money to grow? Contrary to conventional advice, it might pay off to keep closer watch of your investments and to actively manage them, says Alberto Rossi, finance professor at the University of Maryland’s Robert H. Smith School of Business.

Active Investing
Photo by stevepb (Pixabay)
Active Investing

Rossi and University of Melbourne professor Antonio Gargano, in their recent working paper, “Does It Pay to Pay Attention?” studied a trove of brokerage account data, examining how often investors logged in on their trading accounts, what information they consumed, how much time they spent processing that information, and, how their account balances fared. They found that the more attention investors paid to their accounts, the better their investments performed — at both the total portfolio return level and the individual trades level.

The findings, which run counter to conventional advice against reacting to daily volatility, came as a surprise. “We were expecting to find no relation between attention and performance, or to find a negative relation,” Rossi says.

Conventional advice holds that with their emotions and biases, armchair (or nonprofessional) investors are prone to make more mistakes the longer they spend with their brokerage accounts. To the contrary, the researchers found that active investors were more likely to suss out momentum stocks — that is, stocks whose prices are on an upward track — at a profitably early stage in their rise.

“If you are making the decision of buying a car, I think many people would agree that the more research you do, the better decision you will make,” Rossi says. “In stock markets, it’s very difficult to determine whether dedicating more time to this decision will give you better performance or worse performance.”

To be sure, there is variance among investors. Many can acquire valuable information about a stock from their trading platform, but only some are able to convert that into profitable trades. Others will be unable to process the information they acquire, or will misinterpret the information, leading to bad trades.

On average, Rossi says, investors whose activity was recorded in the data logged in to their brokerage accounts every 22 business days — about once a month. But the more active investors logged in several times throughout the day. The data, which included more than 18 million online page views by investors, allowed Rossi and Gargano to examine not only the trades the investors made, but also the analytics they spent time with and the research pages they read.

What types of investors are more inclined to keep active watch over their portfolios and to profit as a result? The research found that account holders with higher invested wealth were more attentive, as were those who invested in small capitalization stocks, growth stocks, momentum stocks and the overall market. Older investors were more attentive than younger ones, and men were more attentive than women.

High-attention investors trading stocks that had a high market capitalization and trading volume and high volatility fared particularly well, the report says, partly because of the higher number of analysts and news on the stock.

The study’s baseline analysis couldn’t determine whether accounts were performing well because investor paid more attention to them or whether investors were paying more attention to their portfolios because they were performing well. So the researchers used panel regressions to “disentangle the two effects” and to control for investor skills. “This way we can see whether the periods when they pay more attention are associated with future performance,” Rossi says.

Next, Rossi and Gargano plan to study whether the amount of attention an investor commits to a brokerage account affects investor biases, specifically the disposition effect. The disposition effect relates to the way in which investors realize gains and losses in stocks.

Research has shown that people tend not to sell stocks that have lost value, even though they can receive a tax benefit for doing so. Investors tend to sell stocks that have gone up in value, and hold on to ones that have lost value. “It’s actually a huge mistake,” Rossi says. “People hate to realize losses, but people love to realize gains.”

READ MORE: Does It Pay To Pay Attention?, by Alberto Rossi and Antonio Gargano, is a working paper available for review on the Social Science Research Network.