Thanks to the Internet, commission costs on buying and selling stocks have plummeted in recent years. Is it coincidence that trading volume has soared with the spread of online trading, or is the Internet encouraging individuals to trade more than ever?

The evidence suggests that the World Wide Web makes for a lot of trades. For instance, a recent study by economists James J. Choi, David Laibson, and Andrew Metrick found that trading activity nearly doubled in two corporate 401(k) plans the plans introduced a web-based trading channel for participants. (Working paper No. 7878, "Does The Internet Increase Trading? Evidence From Investor Behavior in 401(k) Plans," can be found at www.nber.org.)

In general, the economy benefits from more trading. But it is disturbing that the trading surge took place in retirement savings plans, an investment vehicle where investors should be patient and long-term rather than wheel and deal for a quick buck. Both financial market theory and history suggest that a disciplined, long-term approach with minimal trading greatly increases the odds investors will reach their long-run financial goals.

Online or offline, it's tough to beat the market. For one thing, investing is the most competitive business in the world. For another, markets move at quicksilver speed in a global economy linked by computers, satellites, and fiber-optic cables. It's remarkably difficult to systematically gain an investment edge on everyone else.

To be sure, just as there are great painters, novelists, pianists, and basketball players, so there are investors with unusual talents and insight, such as Warren Buffett. Yet how many "Warren Buffets" are there in retirement savings plans? Not many. Individual investors who trade stocks by the hour or the week, or those who move in and out of mutual funds several times a month or quarter, are wasting their time and money.

 


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