Investing often sounds like a get-rich-quick game.
I’m sure you’ve heard of people who suddenly got rich investing in bitcoin, or those who jumped on the GameStop train and made hundreds of thousands of dollars, seemingly in the blink of an eye.
After all, this is not investing. At least not responsible investment.
Let’s talk about long-term investing versus simple stock trading to make money fast. One (and I’m sure you can guess which one) almost always gives better results than the other.
What is active stock trading?
When I say stock trading I mean active stock trading. It is buying and selling stocks (or stock options) in order to generate short-term profits.…
You can trade stocks several times a day (called day trading), several times a week, or even several times a month. Opinions differ, but I think you are “trading” if you have not owned shares for over a year.…
Stock market volatility makes stock trading possible.
We’ve all seen stock quotes on websites and on television. Individual stock prices fluctuate throughout the day depending on a variety of factors, including world events and company news. Market indices (such as the Dow Jones Industrial Average, S&P 500) are priced in line with the prices of their constituent stocks.
Stock traders study the news for information that they believe will allow them to predict which direction a particular stock (or entire indices) will move on a given day. Of course, a winning trade depends on much more than a little information. If winning the trade were as easy as reading that Peloton shipped more bikes than expected, buy stocks and then sell them at the end of the day, I’m not sure why anyone would go into their day to day job.
What’s wrong with stock trading?
There is nothing wrong with trading stocks if you understand what it is – entertainment – and act accordingly.
Trading stocks has more to do with poker or sports betting than investing.… This is speculative. Despite what they say, most traders’ results are more related to luck than skill.
Trading stocks, like poker, is a zero-sum game. When you make money, someone loses it. Vice versa. Interestingly, the same cannot be said for investing (more on that in a minute).
The thing about zero-sum games is that you don’t want to play them unless you can be absolutely sure that you will win at least 51% of the time.
Just think about the fact that every time someone trades a stock (in the short term), someone else ends up at the opposite end of that trade. Every time you make a decision to buy or sell a stock, there is someone in the world who thinks it’s better to go the other way.
The biggest argument for avoiding trading is the fact that you are playing the game with smarter people with much more resources.:
- More brains (hedge funds using an Ivy League MBA).
- More capital (billions!).
- Faster technologies (their trades are made even before I pulled out a quote).
- Better infa (they have their own sources).
If you’ve ever watched the show Billions, you know what I’m talking about.
I hate to tell you this. But unless you have good reason to believe that you can beat the best Wall Street players, you will lose money in the long run trading stocks.…
What, then, is investing?
Gambling is stock trading, like gardening is investing.
There is famous quote economist Paul Samuelson, Nobel laureate:
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $ 800 and go to Las Vegas. “
For most, gambling is not boring. On the contrary, some find gardening enjoyable (and not boring). But I don’t think anyone would call gardening exciting…
Good investment is exactly what you need. It doesn’t have to be 100% passive. You can happily follow economic trends, look for opportunities and adjust your distribution. But successful investors do it slowly and methodically.
More details: Allocation of assets to young investors
Investing takes time
Sometimes I get emails from readers something like this:
“I read your article on how to start investing last week. I bought these shares for $ 100 and have already lost $ 5. Thanks for nothing! “
Have they read the article at all? Probably no.
If you think you can just buy stocks and watch your money just go up and up and up, you’re going to have bad times.
It is possible that you could invest your money in a highly responsible investment like a general stock market index fund and lose 10%, 20%, or even 30% of your money tomorrow, next week, or next month. Unlikely, but possible.
But in reality, you will not lose this money if you do not panic and sell your position. Investing is a long term game. The longer you stay in it, the better you will get it.…
If you look at historical moving 30-year returns on the S&P 500 since 1926, then worst The average annualized return for any single period was 8%. This was if you invested in the midst of the market shortly before the Great Depression. For most other periods, your average annual return would be between 10% and 13%.
Past performance may not indicate future performance. But in three decades, the S&P 500 hasn’t let anyone down.
More details: How to Invest in the S&P 500
Trade harms your wealth
There is a popular joke among investors:
“Time in the market is better than time in the market.”
Research from the journal “Finance” (and countless others) demonstrate over and over again that active trading does not pay off for average investors.
What about Wall Street? Individual investors may not be able to move forward with active trading, but of course this is why hedge funds exist, right? Warren Buffett’s famous (winning) $ 500,000 bet With hedge fund managers that they have not been able to beat the S&P 500 in 10 years, even that is questionable.
The simple truth is that the longer the time frame, the harder it is to beat the market average return. There are very few professionals who can prove they have surpassed the total return of the S&P 500 in 20 years or more.
If this is true, then why are investment professionals needed at all?
Why do large banks have merchant cash desks and give out six-and seven-figure bonuses to their employees? Some reasons:
- They have different goals. They think about the short term, not the long term. They trade to hedge other investments. They aim to reduce volatility or provide stable income. They have many reasons to trade that are not really related to long term returns.
- They have suckers for clients. A large percentage of people will never stop to research the long-term performance of their financial manager – they are just worried about this year.
- They need to justify their existence. It is difficult to charge clients 1% or 2% of their assets each year if the firm simply keeps the client’s money in index funds.
- Finally, very a small percentage of them actually make money…
History and research proves that your best chance of good long-term investment returns is owning the entire stock market and sitting around for ten years or more.
Is there a small chance you can find a finance manager who does better (or even do it yourself)? Yes small one. But when you factor in the likelihood of you picking a winning manager (or winning in market time yourself), you’re better off buying and holding every time.
Investing requires patients and discipline
Let’s go back to the gardening analogy. A tree doesn’t grow overnight more than my impatient reader’s money doubles overnight.
If you want to grow something, you plant a seed and water the soil a little every day. Then you are waiting.
If you want your money to grow, you open your account and deposit a little more each year. Then you are waiting.
There will be times when things don’t look so good. There will be failures. The economy will fall apart and the market will crash. However, stay on course.
If you have a vegetable garden and rabbits eat all the carrots, you will not pluck tomatoes and cucumbers and just give up.
As an investor, you shouldn’t give up when there are downtime days (or months, or years).
Panic selling is a dangerous game. Nobody knows when the bear market will bottom out. Too often, investors who sell in panic wait too long to sell and too long to buy back. Consequently, they receive little benefit from the sale because they miss out on the best days of the market after it recovers.
More details: The bear market is against. Bull Market: How Do We Know Where We Are?
Selling and buying in a crash might work, of course, but Only if you timing right. And no one has a crystal ball. If hedge funds can’t always do this with all of their resources, don’t assume you can!
Be patient. Stay on course. Invest your money and get on with your life. You will thank me in 30 years.
Can you ever trade?
While active stock trading can be fun, investing well is boring. it should be boring.
But what if you enjoy trading? For fun, education and – yes – even for haste?
It’s perfectly ok to trade… Open an account on Robin the Hood, or TD Ameritrade, or another broker and bargain.
But if you want to be smart, just follow my three rules:
- Treat trading like fun / education, not as an investment. In other words, expect to lose money.
- Never borrow money trade (no margin).
- Never trade more than 10% of your net worth.
More details: Best Online Brokerage Accounts for Beginners
Summary
Trading stocks is not an investment.
Trading is speculative, exciting and short-term. Investing is methodical, boring, and long-term.
Advanced technology in stock broker apps makes buying and selling stocks so easy it can feel like a game rather than real life.
Keep trading if you like, but treat it like fun. Set a budget and stick to it.
Meanwhile, learn to be a committed and sober long-term investor…
Start small if you need to, bbut make your money work. Then forget about it until you get old.
