More and more often it can feel like today’s world is constantly pushing you to take action: social media feeds are always refreshing, news is always breaking, and the value of your portfolio is changing every second. Today’s investors have more information at their fingertips than they’ve ever had before, and every day they are presented with the same question: “what do I do with all of this information?”. It can be incredibly overstimulating and understandably difficult to shake the urge of wanting to constantly make changes to your portfolio, especially when there is so much noise prompting you to do so. Because of this, it’s worth understanding the differences between short-term trading and long-term investing, as well as the advantages and tradeoffs of each approach.
Trading and investing often get lumped together, but they are two fundamentally separate approaches to markets. Trading is about taking advantage of short-term price movements – reacting to momentum, news, technical patterns – with the goal of earning a profit over a short period of time (anywhere from a few seconds to a few months). Investing, on the other hand, is about owning a business and letting it build value over a long-term horizon. While traders are focused on trade timing, execution, and short-term price movements, investors will be more focused on things like fundamentals, valuation, and future growth prospects. Despite the drastically different approaches, the best traders and the best investors are going to share a number of important traits like discipline, emotional control, and sound risk management.
While successful traders and investors typically share these traits, they often differ in how they utilize them. Because traders are often making investment decisions every single day, they must be able to consistently exercise discipline and emotional control. Chasing a trade due to emotional attachment or failing to exercise proper risk management can have severe consequences – profitable trades can suddenly unravel, and marginal trades can quickly turn into huge losses. For investors on the other hand, they are not making investment decisions every day. In reality, investors will likely only need to exercise these traits a few times a year.
Being a successful trader can be incredibly difficult. Studies suggest that only about 5% of day traders (someone who buys and sells securities within the same day) are able to achieve consistent, long-term profitability. Trading can also come with immense psychological pressures and high time commitments. Given all of this, you might be wondering why anyone would want to be a trader in the first place. People can be drawn to trading by its intense and fast-paced nature, the lure of achieving quick profits, and the potential to avoid long-term downturns by only focusing on short-term trends.
If you are like most humans, however, dealing with that level of stress every single day would likely lead to poor decisions and poor outcomes. Long-term investing tends to work for most people because it strips away the noise. Instead of chasing headlines, timing the market, or reacting to every swing, investors focus on owning quality assets and letting time do the heavy lifting. Investors prioritize diversification, minimizing costs, reinvesting gains, and remaining patient for the long haul. Over the years, compounding can turn small, consistent returns into meaningful wealth without requiring constant decision making.
Trading can certainly be exciting, and the potential to earn outsized returns over a short period of time can tempt even the most disciplined investors to give it their best shot. For investors looking to capture some of that excitement, they can use short-term trading opportunities to start new (or add to existing) long-term positions in their portfolio. You can experience the rush of making real-time investment decisions with the security of a long-term horizon – all with only a fraction of the stress relative to trading!