Trading or Investing: Which One Are You Really Doing?

Here comes the fear...

On Tuesday, we had the largest one day drop in US stocks in two months (S&P 500 -2%) as "investors were unnerved by economic data suggesting interest rates have further to rise". The FUD (Fear, uncertainty, doubt) set in, and with all the negative headlines it’s easy to get nervous about holding assets.

It made me think of my market making days and dealing with different financial institutions. Whether it be hedge funds, insurance funds, pension funds, mutual funds, or any other money manager. The first thing all these entities do, is create a clear mandate and rules on what they invest in and how they manage risk. No investment is ever made until this is completed and approved.

"Every battle is won or lost before its ever fought."

Connecting the dots. I see that normal people when investing, don’t always define who they are, and what their goals are.

So that’s the theme of today’s post...

The problem:

It's not that the market is worrying, or that stocks can go down tomorrow (of course they can), or that there may be better opportunities (of course there will be). The world is unlikely going to end tomorrow. If it does, our investments are the least of our concerns!

The truth, is that we become more prosperous every year as human beings. Never has it been a better time to be alive.

The problem is that many get confused and don’t invest because they haven't defined whether they are an Investor or a Trader.

So, “what's that got to do with market moving? I just want to make money.”

Everything. Since it will determine the meaning you give to market moves, and importantly if/how you react to them. Different investors have different outcomes, and that’s why we have markets in the first place!

Without committing to a game plan, our emotions are always going to be at the mercy of a newspaper article or equivalent. Emotions are not usually good for business in finance.

That’s when we hear comments like "I'm concerned, I think markets are going to sell off", "I'm worried because its volatile, I don’t know what to do", “I’m waiting for the right moment”. This is fear talking, and most let it paralyse them. The cost is enormous over time. Imagine not turning up at work for fear that you might get a pay cut.

"Emotions and investing are never a good combo, because fear and greed will often lead us to impulse decisions."

"The primary difference between a rich and a poor person is how they manage fear."

"Be fearful when others are greedy, and greedy when others are fearful."

Investing and trading are both great ways to profit from financial markets. That said, they are two very different disciplines. Investing is a long-term approach, typically over decades, that involves buying assets and building a portfolio over time. Trading is a short-term approach that involves buying and selling securities frequently to make a profit.

Without knowing your investment identity, you’ll never be able to have conviction in what you’re doing and will probably have trouble sleeping.

"Clarity is power"

Investing vs. Trading: What's the Difference?

Investing and trading have different goals and strategies. Here are the key differences:

1. Timeframe: Investing is a long-term strategy that involves buying and holding securities for an extended period, typically for several years or even decades. Trading, on the other hand, is a short-term approach that involves buying and selling securities frequently, sometimes within a day or even hours.

2. Risk tolerance: Trading is generally considered riskier than investing since it involves taking advantage of short-term price fluctuations. In contrast, investing is a more conservative approach that focuses on long-term growth, and thus it carries less risk.

3. Analysis: Trading can require an in-depth analysis to identify short-term price movements and trends. On the other hand, investing requires understanding of market trends over time and building a portfolio that performs over long periods.

4. Return: Trading aims to make quick profits, whereas investing focuses on long-term growth. Trading can be more lucrative than investing if done correctly, but it requires more time and effort.

Are You a Trader or an Investor? Here's How to Tell:

1. Define your goals: If your primary goal is to grow your wealth over the long term, then investing is likely the better approach for you. However, if you're looking to make quick profits, then trading may be a better option.

2. Assess your risk tolerance: If you have a high tolerance for risk and are comfortable with short-term market fluctuations, then trading may be suitable for you. However, if you're risk-averse and prefer a more stable approach, then investing may be a better fit.

3. Analyse your time horizon: If you have a long-time horizon and are willing to hold your investments for several years or even decades, then investing is the better approach. However, if you have a short time horizon and want to generate quick returns, then trading may be more suitable.

4. Consider your skill level: Trading requires a lot of technical knowledge and experience to be successful. If you're new to investing, it's usually better to start with a long-term investment strategy, such as investing in a diversified portfolio of mutual funds or exchange-traded funds (ETFs).

In summary, its critical to define if you are investing or trading. Get clarity on your investment goals, risk tolerance, time horizon, and skill level. Knowing this takes you to the next level in managing both your investments and your emotions through ever moving market conditions.

Call to Action:

So, what is the case for you? Message me.

For me, I have created and manage both long term investment portfolios, and short-term trading portfolios. I approach each with a totally different mindset which I know is crucial to each performance. I'm clear when I open each portfolio, which identity I bring to it.

For example, one of my long-term investments in Artificial intelligence (AI) that I mentioned in my last post. I add periodically, on monthly basis, without concern of short-term fluctuations up or down. By adding periodically, it removes concern over "getting in at the right time” or “short term price fluctuations” and gives me the discipline of continuous investment. It averages entry price over time to reduce any single trade impact (Dollar Cost Averaging is the term for this approach). By adding when the market goes up and/or down, with discipline, it removes the fears I mentioned at the start of this article. Day to day news does not keep me up at night.

“It's not about timing the market, but about time in the market,”

Long-term portfolios, contain investments with time horizons greater than 10 years. To get an idea of risk tolerance, 85% of assets reside in these portfolios spread across diversified investments in real estate, single name stocks, indexes (variants of stocks, commodities & bonds ETFs). Diversifying or holding different assets/asset classes, is there to reduce the risk and volatility of the portfolio over time. The goal is to make a 5-10% return on average per year, and yet investment allocations are skewed to areas I think can outperform that significantly.

As you can see, the short-term trading portfolios have materially less capital allocation for two reasons.

1) Its much riskier taking short-term trades, and so I take higher risk with smaller capital. I can handle larger losses (% of capital) in these accounts at worst case. (Worst cases happen more frequently than you’d think in trading - be prepared!).

2) I can get leverage on trading accounts which means boosting the size of exposures to risk. I'm trading daily or weekly which means turning over trades/positions quickly for short term profits.

My goal is to make 50% of the account which I reset when I achieve. Importantly, on this portfolio I am actively looking for market moves, up or down. I can easily short any asset (profit from market crashes) in times of weakness and am therefore excited by higher volatility. Not only do I not fear it, but I want to see how I can profit from it!

“Volatility is opportunity.”

My skills are constantly evolving on both sides of investing and trading, and I appreciate they are two completely different disciplines. Delving deeper into the difference in philosophy of different investors will also give us a better understanding of how and why markets move. Continuous learning is one of the major goals behind this blog.

What would you like to hear more discussion on, trading or investing? Message me.