Five Evidence-Based Investing Rules: Trade Less, Pay Less, Diversify

Investing advice is mostly opinion, but a few rules are backed by solid data. This article only explains how to do the arithmetic; it is not investment advice.

1. Trade less, especially when the market is wild

A well-known study of US households found that the most active traders earned 11.4% a year while the overall market returned 17.9%, and the gap was almost entirely trading costs. A study of China's 2014-2015 boom and crash found that the smallest 85% of household accounts traded too often and ended up about 250 billion yuan worse off than if they had simply held, roughly 30% of their principal. In that episode, Chinese household accounts turned over almost 18 times a year, versus about three quarters of a turn for the US households.

The lesson is not "never buy stocks". The more you trade, the lower your take-home return, and the temptation peaks exactly when the market is hottest. (The US data is from the 1990s and China's fee structure differs, but the principle is the same.)

2. Don't borrow to invest, and don't buy what you don't understand

When you buy stocks with borrowed money and prices fall below the margin line, you are force-sold. A paper loss becomes a real one on the spot, with no chance to wait for a rebound. Chinese rules require at least six months of account history and an average of 500,000 yuan in assets over the last 20 trading days to open a margin account. That threshold alone tells you it is not meant for ordinary savers. Using credit cards or consumer loans to invest is leverage in disguise.

3. Use broad index funds as the long-term core

Actively managed funds collectively hold something very close to the whole market, but the extra management fee comes straight out of your return. Few funds earn back what they charge. This is debated: some researchers argue the standard tests are too harsh on fund managers, and Chinese data is less one-sided than US data (S&P Dow Jones figures to June 2025 show 60.5%, 69.6% and 50.8% of large-cap A-share active funds trailing their benchmark over 1, 3 and 5 years). The conclusion that holds either way: index funds are cheap.

4. Within the same type of fund, pick the lower fee

Every extra 1 percentage point of annual fees leaves you with about 18% less after 20 years and about 26% less after 30 years, assuming two funds earn the same before costs. Check management fee + custody fee + sales service fee, and remember purchase and redemption fees too. You can see the effect with our compound interest calculator.

5. Don't put everything in one stock, one platform or one property

If assets do not all rise and fall together, spreading money across them leaves your average return unchanged and makes your balance swing less. Putting everything in a single stock, platform or house means that if it fails, you fail. Diversification doesn't guarantee you won't lose, and the classic proof is mathematical rather than a measured "how much loss it saves". Buying a broad index fund is the easiest way to diversify.

And if a stock is falling

Sell by a rule you wrote down in advance rather than averaging down in the hope of recovering your cost.

Source and license: adapted from HowToLiveBetter (高性价比人生指南) by eternity4719, Section 5 "Don't Waste Money", licensed under CC BY 4.0 (https://github.com/eternity4719/HowToLiveBetter). We condensed and translated the original entries; see the source for evidence grades and citations. Rules described here apply to mainland China and may change. This is educational content, not investment, tax or insurance advice.