Inactive Traders, or ‘Dead Investors’, Often Yield Higher Returns, Experts Say

The term “dead” investors may seem ominous, but it refers to an investor who uses a long-term “buy and hold” strategy. Believe it or not, these “dead” investors often outperform active traders with greater investment returns.

Why does a “dead” or inactive investor get better outcomes? Experts suggest this is because passive trading helps bypass impulsive, emotionally-driven decisions, excessive trading costs, and tricky taxes that come with active trading.

Brad Klontz, a certified financial planner and financial psychologist at YMW Advisors in Boulder, Colorado, says the biggest threat to investor returns isn’t government policies or corporate actions, but human behavior.

Many investors are driven by their emotions, leading to rash decisions that can negatively impact their investment returns. Selling investments in a panic or buying when overly excited can lead to financial loss. As Klontz says, “We are our own worst enemy, and it’s why dead investors outperform the living.”

Statistics also show that “dead” investors tend to ride out market volatility better. They hold onto their stocks through market fluctuations and benefit from the consistent recovery and growth of the stock market over time.

According to investment behavior study by DALBAR, in 2023, the average “live” stock investor’s return lagged the S&P 500 stock index by 5.5 percentage points. The study suggests that this gap is largely due to human behavior impacting investment decisions.

The “buy and hold” investment strategy does not mean investors should completely ignore their portfolio. Instead, it encourages investors to take a longer-term outlook and avoid knee-jerk reactions to market fluctuations.

Financial advisors often recommend investors review their asset allocation regularly to ensure it aligns with their investment goals and rebalance it as required. They also suggest automating savings and investing to a certain extent to reduce the chances of human error.

Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management, suggests avoiding an immediate emotional response to market moves, as it rarely leads to a good outcome in the financial markets.

Using investor-friendly funds like balanced funds and target-date funds can also help automate certain investment tasks and limit transactions, further supporting the buy-and-hold strategy.

Ritholtz concludes, “Less is more,” when it comes to making investment transactions.