The 5 Mistakes Every Investor Makes and How to Avoid Them, 2nd Edition

MISTAKE #2Active Trading

In 2019, there were 7,945 mutual funds in the United States and over 3,400 U.S. hedge funds, many of which trade U.S. stocks. On top of that, there are actively managed exchange-traded funds (ETFs) that do the same, and thousands of separately managed account managers, brokers, and investment advisors also trading U.S. stocks. For good measure, let's throw in tens of millions of regular, everyday people all over the world who also trade U.S. stocks. That's a lot of people trading. So how many U.S. stocks are all these people trading, you might ask?

Maybe 100,000 exchange-listed stocks? Nope. How about 25,000 exchange-listed stocks? Nope again. There are fewer than 4,400 companies listed on the public exchanges! Yep, that's right. Tens of thousands, if not hundreds of thousands, of professionals, plus tens of millions of other people are trading these 4,400 or so stocks.

It sounds silly—and it is. Pause for a moment and imagine a visual of tens of millions of people all in the same place trading a few thousand things back and forth. It's preposterous. Yet that's the active trading that takes place in the stock market every day.

If we combine the 4,400 or so exchange-listed stocks into one portfolio, they have a combined return called a market return. Common sense and basic arithmetic tell us that there must be winners and losers to the market return if people are trading within that portfolio. Here's the rub, though. Trading isn't free—there is always ...