Trading vs Investing
How many times have you been around the break room or with your friends and someone mentions an investment that they’ve made that is “making so much money” for them? Do you ever ask how long they have owned it? It could be something they’ve owned forever or a stock they just bought last week and sold today for a nice profit. Was it truly an investment or was it more of a speculative short term trade? So what is the difference between trading and investing anyway? Aren’t they interchangeable?
Let’s dive into trading first. If you’ve been around me much, you’ve probably heard me say “a good trader is like a good hitter in baseball, they are right about thirty percent of the time.” Everyone will tell you about the three they hit on, but no one wants to talk about the seven strikeouts they had along the way. The basic trade consists of choosing a stock, deciding a price you want to buy in, then figuring out a price you would like to sell it to make a profit. Hopefully you are buying at a dip in value and selling at a peak to make money. This is normally done over a short period of time. Some people will trade the stock just for the day, while others will hold it for a week, month, or longer. Your goal is to have a plan for the trade before you buy in, stick to that plan, and over the long term, hopefully your successful trades will outweigh your losers. Tools like technical analysis (chart reading) can help you find some short term trends to guide your strategy. There are thousands of different trading strategies that coupled with discipline can help you have success trading on any stock. With so many unknowns, trading is inherently risky.
Typically, investing on the other hand, is over a much longer period. We are trying to work with things you can control to offset risks of the market. You are looking out to the future, setting a goal, developing a portfolio of stocks, ETF’s, mutual funds, and bonds over time that will help you create the desired return necessary to reach that goal. Generally speaking, you will be spreading your money across many different asset classes like large companies, small companies, international companies, and fixed income vehicles. The idea is to find the sweet spot of risk reduction to return that will guide you to success. You may not always outpace the overall market, but hopefully you won’t be losing as much as the overall market on the down years, and make no mistake, there will be down years. Investing is not looking to hit the ball out of the park. We are hoping to hit singles, doubles, and maybe a few triples here and there to help us win the game. Think of it as that baseball team that isn’t flashy on the field, but when you look at the scoreboard at the end, they have scored ten runs and pieced together a victory.
Keep these two strategies separate in your mind. It’s great to do one, the other, or both, but never take a trade and try to stretch it into an investment. It’s like trying to stretch a single into a double and getting thrown out at second. Be happy with your single and have a chance at scoring on the next few at bats. On the same token, never take something you bought as an investment and turn it into a trade. Its difficult to keep your emotions out of this. You will inevitably buy-in right before a downswing in the market and you will want to sell. Generally, these down periods don’t last long, so trust why you bought that investment in the first place. As I always suggest, take advantage of an objective eye of a trusted advisor to help keep you disciplined whether you are trading or investing.