I was reading an article in the New York Times about day trading when I followed a link to a study that concludes that trading is hazardous to your wealth.

First, the article in the New York Times shows how difficult day trading can be. One trader featured in the article was down $500 in the morning and then was up $210 in the afternoon. However, after taxes, fees, and commissions, he was actually only up $60.

The trader in the article has been doing this for many years and averages about $100,000 in income each year. Sounds good, but he is very experienced and performs much better compared to most day traders. Data shows he is in the top 1 or 2 percent of day traders.

The link to the study about day trading shows that the more people trade, the lower their stock market performance is. The study looked at 60,000 households from February 1991 through December 1996. Fairly good times for the market.

While most households earned a 17% return through mutual and index funds, the 20 % of households who traded the most only earned a 10% return.

Of course, there are day traders who make some great trades that can make their year - whether they actually know what they are doing or not. Unfortunately, the study shows that many day tradders have the confidence they can make these winning trades. This over confidence leads to day tradders making numerous trades that end up as losers.

The reason the high number of trades plays such an important role is because there is a high cost of trading. While people in index funds make a similar return by doing nothing and paying less than one percent in fees, day traders spend countless hours analyzing stocks and paying around 3% in fees.

Another reason most day traders make less money in the market is because they are competing with huge financial institutions that use supercomputers to make trades. When it was one human versus another, some day traders could find an advantage. However, it is tough to compete against a supercomputer at Goldman Sachs.

I've always felt that active trading is a fools game. Sure there are some winners, but most people work hard to keep up with index returns or end up losing money for all of their efforts. My belief in a passive investing strategy is backed up by a lot of data and financial gurus. I just thought I would add another to the list by sharing this study.