If you’re relatively new to stock investing and believe that early successes mean that your portfolio will continue to be profitable, here’s some sobering research.
A University of Iowa study, which will be published in a forthcoming issue of Review of Financial Studies, concludes that it takes an average of 24 trades before newcomers learn the investing ropes, so newcomers are likely to lose more frequently than they win at first. The study examined data from 1995 to 2000 of more than 32,000 Taiwanese investors.
When investors experience good returns at first, they tend to become too optimistic or too confident about their investment skills, says Yiming Qian, who is an associate professor of finance at Iowa’s Tippie College of Business and one of the study’s researchers. As a result, they then tend to invest too aggressively in similar assets and leave themselves open to potentially big losses.