{"id":1137,"date":"2014-09-11T15:56:45","date_gmt":"2014-09-11T15:56:45","guid":{"rendered":"http:\/\/vhfinancialmanagement.com\/?p=1137"},"modified":"2014-09-11T15:56:45","modified_gmt":"2014-09-11T15:56:45","slug":"investing-vs-trading","status":"publish","type":"post","link":"https:\/\/vhfinancialmanagement.com\/2014\/09\/11\/investing-vs-trading","title":{"rendered":"Investing vs Trading"},"content":{"rendered":"
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In today\u2019s fast paced, media driven, advertising laden world we are bombarded with new ideas.\u00a0 Take this new drug and you\u2019ll feel better (just don\u2019t forget the side effects could kill you!).\u00a0 It\u2019s hard to disseminate reality from what we are \u201ctold\u201d to believe, feel, or think from the advertising mecca of today\u2019s media.<\/p>\n

I occasionally will receive a flyer in the mail inviting me to a conference to learn how to get rich by using new trading strategies.\u00a0 Learn how to become a trader, quit your job and become rich!\u00a0 Sounds good, right? Remember your mother told you not to believe everything you hear!<\/p>\n

What\u2019s the difference between trading and investing?<\/p>\n

Trading and investing are two different strategies used to participate in the stock market, and they vary in philosophy, as well as, execution.<\/p>\n

Investing<\/strong><\/p>\n

Investing is quite simple. \u00a0By using the equity markets over a long time horizon, we can build wealth.\u00a0 Think of investing as the tortoise in the fable about the hare and the tortoise. \u00a0With investing our objective is not to out run the hare (market).\u00a0 We simply want to capture what the market gives us\u2026..we want market returns.\u00a0 Research has shown that over time market returns will out-perform other investment strategies, such as market timing (trading).<\/p>\n

Simply put: investing using index (or passive) strategies can be a wise move for long term investors. What may seem old and stodgy is actually very wise and prudent.<\/p>\n

Trading<\/strong><\/p>\n

Trading is a different approach to investing.\u00a0 Trading usually involves short (or shorter) term holdings to maximize the ups and downs of the market or individual positions.\u00a0 This means the trader must know when to get in the market (or holding) and when to get out.\u00a0 To be an effective trader one must get both sides of the trade correct from a timing perspective.<\/p>\n

Some traders are only in an investment for a few minutes, while others can hold positions for several weeks or months\u2026..but traders by definition will not hold an investment long term.<\/p>\n

Conclusion<\/strong><\/p>\n

As a fee-only financial advisor (and a CFP\u00ae), I understand the equity markets very well, but I still am not confident enough to utilize trading strategies for my own portfolio (let alone clients’ portfolios!).\u00a0 Why? Because investing wins!\u00a0 Picking the right entrance and exit points, as well as, the appropriate investment is near to impossible when compared to the market.<\/p>\n

Research compiled by Schwab Center for Financial Research illustrates this point in a compelling fashion. \u00a0The data looks at mutual funds that try to out-perform the market (actively managed funds- also considered a trading philosophy).\u00a0 The research highlights actively managed funds that finished in the top quarter of funds in the same class (market segment). \u00a0The data covers the ten year period from 2001-2010, and of the 1200 funds there are 1113 funds that finish in the top quarter for at least one year. \u00a0So, almost all of the funds finished in the top quarter at least once in ten years.<\/p>\n

The numbers change dramatically as the time frame lengthens. Funds finishing in the top quarter for at least five of the ten years drops to 130, and funds that finish in the top quarter for at least 8 or the 10 years is down to only 1.\u00a0 Are you talented (or lucky) enough to pick that one fund out of a list of 1200?<\/p>\n

Sure, someone out there has hit a home run by picking correctly, but also remember someone picks a lucky lottery number every week, as well. It\u2019s not about being lucky. It\u2019s about being smart.<\/p>\n

We can\u2019t control the market, so why try? \u00a0Simply capturing what the market will give us is all we need. It proves more productive to focus on controlling the things that are within our control.\u00a0 If we can control how much we spend, how much we save, and how much we pay in taxes, we will inevitably grow our wealth. \u00a0Plug that in with a solid investment strategy based on a long term perspective (Investing) and you have a winning combination.<\/p>\n

The next time you see a commercial showing a room full of traders staring at rows of high-tech computer screens advertising trading strategies you\u2019ll know the truth.\u00a0 The commercial is advertising a strategy that is developed to make money, but more than likely, over time, you will not be the one making money.\u00a0 Remember, you can\u2019t outperform the market over time!<\/p>\n

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