Watching my 401K balance continue to drop makes me sick to my stomach such that I’ve begun to consider trying my hand at timing the market. I’ve always had a bit of gambler’s blood in me and wonder if I could conceivably learn how to trade successfully without losing my shirt. No doubt, there are benefits and many pitfalls with day trading and market timing when compared against long term investing, but the ultimate goal is the same: to make money. So I’d like to take this opportunity to investigate these investment strategies to see what will ultimately make sense for anyone who’d like to make money in the market. How should I approach the stock market?
Day Trading vs Long Term Investing: Exploring Investment Strategies
The volatile nature and quick liquidity of buying and selling on the same day is what excites and appeals to most day traders. The thought of a quick substantial increase (in paper profits) is very tempting and gets the blood surging. I have to admit, this is something I’ve been toying with for a while, and the more I hear about forex trading, the more I’m intrigued. But our losses can materialize as easily and quickly as our profits, and if we don’t have a complete understanding of the market and its conditions, we can lose everything in an instant. Expecting to make money on every trade is unrealistic and we must fully understand what we are doing.
While the emotional part of myself is interested in the possibility of learning how to trade stocks and foreign currency, my sane self knows that this is something I should not take lightly. That’s because I understand that long-term investing is what makes sense to most of us, and frankly, it’s what I think that average investors should ONLY think of doing. Especially those young enough to be able to really see the rewards of their initial investment.
When I was younger, I had invested in a mutual fund. But it was something I did not hold on to for long. At some point, I sold my shares. Where is that money now? I couldn’t tell you, but I certainly enjoyed spending it. Even back then, I don’t think I really thought about the long haul: if I had not given into the desire to reap those short-term rewards — that is, if I had stayed in my fund for the long term — then I’d have an even larger nest egg than I do now. Of course, all of this is in hindsight, but anyone can see that slow and steady investing can get you pretty far. Whereas to even come close to winning any profits through trading, you’d have to trade with enough funds and volume to make it worth your while. The risk of approaching the market as a day trader would be significant if you have no experience or skills in this area (which is the case for most who try their hand at this).
Investing Throughout History
The 90’s, the age of the dot comers, will go down in the history books forever. The instant boom in certain stocks caused chaotic behavior, with many people making money hand over fist. The boom didn’t last long and it caused an economic crisis, but gave birth to a whole new way of investing. Day trading is the legacy of that gilded age.
Today, the stock market investing climate is wholly different but the market will always remain a place of risk. No one can really predict what’s going to happen to our investments in the long term (although there’s a good chance that the trend will continue its upward march). Even solid and stable companies can go under during hard economic times. The collective mood of investors these days has been dour, as they watch their portfolios stagnate in the limbo brought about by our economic recession. But many others also see this as a great opportunity to buy low and leverage the stock market at its weakest point.
How To Approach Day Trading and Long Term Investing
While I believe that 95% of investors should really just stick to long term investing by learning how to invest in index funds, employing dollar cost averaging and seeking a good mutual fund, I can also understand how stock trading can make sense for a small segment of the investing population. Conventional wisdom reminds us that long term investing makes the best sense for our portfolios as it increases our chances of actually making money if we stick to the program. It is much much trickier to make money with day trading and market timing strategies since it will involve a lot of knowledge, experience, skill, luck and active work to have a chance at being successful in this endeavor. If we apply prudent risk management here, then it makes sense to involve only a small portion of our assets to this cause, if at all. Another option is to join fantasy trading (or virtual trading) platforms where we can have fun trading with fake money and a practice portfolio.
Okay maybe I’ve somehow convinced myself to just try out those online virtual stock trading games for now. 