Being realistic in a world where everyone has an opinion, and everyone’s opinion is in your face (via social media) is an important skill. Understanding the pessimistic and optimistic argument for anything is wonderful, and surely complimentary to developing an understanding of that which you’re focused on, be it eating better, getting more sleep, exercising, or managing your money.
With the recent wave of DIY trading platforms (i.e. Robinhood), and the ever-increasing access to information, everything in life seems to have a “hack” or quick-fix to achieve it - whatever that “it” might be.
When talking about investing, or simply purchasing equity or debt assets over an exchange, this still rings true. While that guy on TikTok might have actually found a way to triple his salary just by trading stocks and eventually quit his job, that’s the anomaly. Inherent in a story like that is the incredibly high amount of risk undertaken by that person to find that level of income.
But let’s be clear: that is not investing, nor are the statistics in your favor.
To a less extreme level, it’s also not investing when one buys the flavor-of-the-day stock, and then sells it just a few weeks later when a new flavor is out, or that stock hits its normal eb-and-flow cycle.
The statistics tell us that you’ll find far more favor in investing in positions (stocks, bonds, etc.) that you intend to hold for a longer period of time. We refer to the time which you maintain ownership of a position to be the “holding period.” Warren Buffet has famously said in one of his annual letters to shareholders of Berkshire Hathaway that their “favorite holding period is forever.” Since we will, as individuals, eventually need this capital to get through our retirement days, forever is a bit superfluous, though the point remains: the longer, the better.
Short-term trading, whether it’s day-trading (rapidly buying and selling stocks inside of a single trading day) or other short-term strategies (reversal trading, breakout trading, etc.), can be profitable, though the potential to be so is far less than the tried-and-true measure of long-term trading.
Long-term trading though, with emphasis on longer durations holding a stock, comes with a plethora of advantages not captured in short-term trading:
Less emotion at play in your investment decisions. Should you consider that whichever stock you chose to invest in, you’ll be holding it, for example, for more than a year, then your selection process might (and should) be more vigorous. This creates a propensity for normal weekly ups and downs in the market to bother you less, given you understand you’re in this for many weeks.
Time is your greatest ally. The power of compounding absolutely cannot be overstated when it comes to money. We heard it as kids about savings accounts. Compound interest is king! To take it further, you get more than that with long-term investments. You not only get the potential growth on the positions you’ve purchased, but you can also take advantage of reinvesting dividends, or profits elsewhere, back into that company. With 10 shares of Company ABC that grows 10% this year, plus an additional single-share worth of dividends received, you now have 11 shares of that same company working for YOU!
Reduced fees equals more capital to invest. There are no fees when you’re not making trades. And while there are plenty of zero-commission trading platforms these days, consider that those attractive lack of fees are usually paired with reduced order flow in trade timing. This means your trades, if aimed at timing the market like day trading efforts often do, will be deprioritized (unless you pay for better timing) - with you getting a less favorable price in your trade. Trading costs for day traders can easily exceed thousands of dollars per year.
Tax advantages for long-term investors! The difference between holding a stock for 365 days or less (“short-term capital gains or STCG) versus more than 365 days (long-term capital gains or LTCG) is how much you’re taxed on any profits for those investments. STCG profits are taxed at your marginal tax rate, which is anywhere between 10-37%. LTCG profits, however, are between 0-20%. That’s a tremendous difference, and, over a lifetime of investing, can put one in a far better (or worse) financial standing.
Being too optimistic that you'll be the statistical anomaly in finding success in short-term trading when many do not is risky, and unfair to your investment portfolio and future. Being pessimistic in thinking the long-term market will look like the recent poor market conditions we’ve seen is also unfair to your future. Knowing smart ways to grow your money, a realistic approach, is where the value lies.
Don’t seek the quick-fix to growing your portfolio if you don’t have the appetite for that type of risk. Many have found more growth than they could have imagined by playing the long game. Start playing the long game today, and maximize your time IN the markets by investing the healthiest way possible.