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Trading vs. Investing – Which Do You Do?

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Better in the Dark

This is a guest post from Robert Farrington at The College Investor.  He seeks to help young adults and college students get started investing, and has a great Investing 101 resource.  Though Robert’s audience is a bit younger than many of the readers of this blog his insights are useful to investors of all ages and experience levels in my opinion. 

When you describe yourself and your financial future, do you see yourself as a trader or an investor?  Did you know there was a difference? It’s true, they are often used interchangeably, but they are quite different.   And knowing yourself and the difference between the two can help you understand where you’ll be successful in the future.

Trading is Different From Investing 

Trading and investing have a major difference, and that difference has to do with time. If you are trying to multiply your money over the course of 30 or 40 years, then you are most likely investing. If, however, you are interested in buying a stock today and selling it tomorrow if it jumps a point or two, then you are almost certainly a trader, and not an investor. Trading is often a very short term action, while investing is performed over the long term.

While the terms are quite different, one can perform a trade while still being an investor. For instance, if you have a 401(k) account that isn’t performing as well as you’d like, you might decide to change your overall investment strategy and you would do this by making some trades. You would sell off the shares that no longer matched your investment plan and then you would purchase some new ones that do. With this, you would be trading in order to fulfill the long-range goals of your overall investment plan.

Give Into Temptation 

I think there’s a little piece in all of us that is intrigued by risk and excitement. This is why some people like to skydive and others like to swim with sharks. Still others love the thrill of a short-term trade built mostly on speculation.

We all have our investments, but you know what? Nobody talks about them. Why is that? Because they’re boring. What would we say? Something like, “My portfolio increased by 5.6% last year…” And that would most likely be the end of the conversation. But, what if you decided to make some trades and possibly make some short term cash? You story would turn into, “I evaluated the economy and I realized that this particular stock was undervalued, so I bought 100 shares and they just skyrocketed! I made $1,000 in just a couple of days.”

Because there’s a little need for risk and adventure in all of us, I say give into your temptation….in moderation. You definitely should not risk your entire investment portfolio, but feel free to use a small portion (something like 5%) and trade it as you wish. This will ensure that 95% of your portfolio stays safe within your planned strategy, but yet you can still have some fun with the 5% by making trades and taking a few risks here and there.

Making Trades

If you do decide to take a little risk and make some trades, there are a few basics you should know. First of all, most every trade carries a fee. So, if you sell a stock to make $5, but the trading fees were $10, then you actually just lost money.

Secondly, decide which trading method is right for you. Are you a fundamentalist or a technical trader? Meaning, do you trade based on the movement of the share price or are you making trades because of a certain ratio (like the debt-to-equity ratio, etc.)? Find out what makes sense for you and have a good time.

If you plan on trading at all, you need a strategy, and you need to stick to it.  Just like investing!  Invest in what you know, but also trade in what you know as well.  If you are interested in trading in a certain area of the market, say currencies, but aren’t knowledgeable step back, take an investing course, read up, and maybe use a practice account before you go for it with real money.

Final Thoughts

For some people, trading can be fun, but it’s just too much uncertainty and risk.  Just know that it’s not for everyone. If you aren’t comfortable with it, then don’t do it. But, if you feel like it won’t take over your life then maybe you want to give it a shot. Happy investing!

This was a guest post from Robert Farrington, from The College Investor.  He seeks to help young adults and college students get started investing, and has a great Investing 101 resource.  

Please feel free to contact me with your investing and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.  

 Photo credit:  Wikipedia

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I Just Want to Break-Even Before Selling

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As a financial advisor this sentiment is one of the most frustrating things I have encountered over the years. Generally this is expressed by in connection with individual stocks. Many investors are reluctant to book a loss on a holding until the price recovers to the point where they have at least broken even.

Some investors are just incapable of admitting that they made a poor investment choice. This mindset can be a roadblock to investment and financial success.

I typically ask whether they would make this investment today. What happened in the past is irrelevant. The only consideration is your estimate of how this holding will perform going forward.

There is a huge potential opportunity cost of holding on until your investment breaks even. Could you have deployed these dollars elsewhere and earned a better return by booking the loss and moving on?

I generally subscribe to the use of an overall asset allocation for clients built from their financial plan. But that said, each investment holding needs to have a role in the portfolio. If the reason for keeping a particular holding in the portfolio changes I suggest eliminating or reducing that holding to my client.

Overall my message is that individual holdings are irrelevant. What matters is the overall portfolio and how that portfolio is performing relative to the client’s risk tolerance and relative to the financial goals that it is designed to fund.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.