Investing and Trading use similar tools but are extremely different. Neither is inherently better than the other. Both of them work by buying assets on the stock market with the goal of a Return on Investment.
The big difference is the approach. When it comes to investing, you buy assets and hold them for years. You bet on the future of a company and how well you believe it will do in the long run. It sounds boring, right? Well, my strategy is boring. I focus on the long-term returns, not the thrill.
On the other hand, a trader focuses on short-term appreciation to make gains. The objective is to maximize returns on a daily, weekly, or monthly basis. Some would call it speculation and gambling. At the end of the day, both investors and traders are betting on the future of a company whether it’s short or long term.
Morgan Housel puts it beautifully when he says:
“Every investor is making bets on the future. It’s only called speculation when you disagree with someone else’s bet.”Morgan Housel
His article “When Everyone’s a Genius (a Few Thoughts On Speculation)” is a gold mine. It showcases the importance of storytelling when it comes to investing.
It’s time to dive into why I focus on investing for more than 80% of my portfolio. As I see myself as a Sheriff when it comes to investing. I’m open to some risk but want controlled exposure for a long-term return.
Different kind of traders and investors
When it comes to investing or trading your wealth there are a plethora of styles.
Investors tend to focus on real-estate, equity, bonds, or angel investing. The majority of casual investors, myself included, focus on index funds and ETFs. These particular tools allow me to diversify my investment and bet on the market and not specific companies.
A real estate investor will look at purchasing multiple properties with the objective of flipping them or renting them out. The problem of real estate investing is it takes considerable initial investment. It’s, therefore, less accessible and takes more time to get rolling. Yet it remains one of my diversification goals. Currently, I stick to REITs (Real Estate Investment Trusts) as they allow me to tiptoe into space before my first property.
As for Angel Investing, it is a whole other can of worms. It takes substantial capital and is a long-term bet on start-ups. The goal of an angel investor is to bring expertise and finances to a burgeoning company with the hopes of a high return in the long run.
I personally don’t trade anything that I cannot afford to lose. My total trades in the past year amount to less than $500 dollars. I’ll simply stick to summing up what each type of trader does.
- Day Trader: seeks to make profits on short trades throughout the day. They hardly hold any funds overnight.
- Scalp Traders: only holds their position over a few minutes/seconds and never overnight.
- Swing Trader: surfs on trends and looks at making a profit on trades over a few weeks/days.
- Position Trader holds positions for months to years but always has the goal to sell for a profit.
The style of trading you decide to follow depends on the time you will hold the stocks or options. Recently with the GME short squeeze, we saw retail traders become position traders and hold with the hope to swing the price.
Overall whether you are trading or investing your decisions will depend on your risk tolerance, knowledge, and time you have at hand. Time is key as being a hobbyist day trader isn’t possible.
Success rate for Traders and Investors
When researching investing at first, I kept bumping into day trading gurus. They were selling a magical system to make millions day-trading. As always, I was cautious about things that sounded too good to be true.
It’s not to say that you can be successful day-trading it is a job in itself. My eyebrows simply rose… why would you need to sell me a course if you made that much money? Recently in a discussion with Coffeezil (Youtuber), Jason Calacanis an angel investor. Explored the fact that successful entrepreneurs and investors share their knowledge for free with retail traders. They don’t need your $300 dollars to make a profit.
Learn more in the video below.
First of all, there are 2 ways to start trading either you go professional or head out solo. When you join a financial firm, your salary itself is set but additionally, you can expect a 10%-30% bonus on the profits you realize. Of course, the returns are capped. But the losses do not impact your wealth.
On the other hand, most traders go out solo. Not only is the capital small at first but you have no safety net. Learning about charts and signals is a step. The only problem? On average successful day-traders will make an annualised return of 10%… Even with a starting fund of $30k you would only be making $3k a year…
Stock options then become a tempting idea as they allow you to swing bigger wins. The only problem is it’s a double-edged sword. As you are exposed to higher losses.
In a study by the University of Sao Paolo and the Sao Paolo School of Economics, it was found that it’s virtually impossible to make a living day trading. When analyzing all traders that began day-trading between 2013 and 2015 they found 97% lost money when trading more than 300 days.
Additionally, despite the high risk, only 1.1% earned minimum wage. Only 0.5% earned the equivalent of an entry-level bank teller.
In Taiwan, day treaders were studied for 15 years from 1992 to 2006. The results were only marginally better. With only 1% achieving what they refer to as abnormal results.
What about investors?
ETFs and Index funds have consistently outperformed day traders. Not only is it easier to get started as you are able to bet on the overall market. For example, using the VUSA, Vanguard’s ETF tracks the S&P500. As long as the S&P 500 rises so will your portfolio.
Over the last 100 years, the S&P500 has returned an annualized return of 10%. Don’t get me wrong investing in index funds is boring. Yet, I much rather prefer boring to terrifying. It also is a terrible place to put your money in the short term. Not one year is guaranteed to be positive. Yet the S&P 500 has never had a negative return in any 20 year period.
You can learn more about my portfolio and investing mindset here. If you haven’t started investing with Trading 212 yet. Today is the day – if you invest as little as £1/$1 using my link, we will both receive a share worth up to £100.
Why do I Invest and not Trade?
I acknowledge that I don’t know enough. That I’m not good enough to beat the market. My objective is not to be rich tomorrow or even next week. Actually, I’ve set my target at 25 years from now. Yes, you read that right. 25 years.
It might be faster if luck strikes and I’m able to pick some good real estate investments or funds. But overall I’m in no rush, I would rather a consistent 10% return that compounds to my benefit. Then going out every day to risk my wealth on some options.
If any of you decide to go the trading route. I wish you every success and hope that you will be in the 0.5%. On my side, I will stick to my 85% index fund strategy.