Day trading may be popular, but it's not investing
Okay, let’s do a quick review of some investing basics. Stocks versus bonds. Stocks represent ownership. When you buy stocks, directly or through a fund, you’re hoping to generate a profit. That means dividends, or if the company does well, through share appreciation.
Bonds, on the other hand, represent a loaner investment. When you buy a bond, you are, in essence, loaning money to a company. The hope is that they’ll pay you back with interest.
Why bring up these simple, basic explanations? Because with so many people working from home, the number of new brokerage accounts opened for the purpose of day trading has risen dramatically. In my opinion, day trading is not real investing. It’s more akin to buying a lottery ticket.
Investing means researching a company, buying it, monitoring it and periodically fine-tuning your portfolio. Long-term investors normally look for successful companies with good corporate leadership. And they diversify among various asset classes.
Investing is not buying a stock at the opening bell and selling it before the market closes. That being said, there’s a significant number of traders trying to make a quick dollar by gambling that they’re going to hit the next hot stock. Day traders are merely speculators trying to find a winning lottery ticket in the financial markets.
The problem is risk. I fear that many day traders often take on an inordinate amount of risk that they just don’t understand. At some point in time there will be a large number of them who will get a costly, real-life education.
I believe the current environment is comparable to the Dotcom Bubble of the late 1990s. Back then, there were ads about successful traders buying their own island. In reality, a lot of speculators lost a great deal of money and it took years to recover.
I fear history may repeat itself for day traders. Recently, speculators came close to sending the markets into turmoil, but after a few hectic days things returned to normal. Some may make a quick dollar but it’s unlikely that the vast majority will fare very well.
Proper long-term investing is normally part of a financial plan. And a financial plan means there is diversification to avoid risk and emergency cash funds to be prepared for the unexpected.
But most important, investors have a characteristic that is very difficult to find in this fast-paced world. Successful investors generally have patience, and they know that, over time, instead of pushing the sell button they need to keep their emotions at bay.
That’s not to say that a speculator can’t get lucky and capitalize on a hot stock. But over the span of a lifelong work career, my experience tells me that most would be better served by thinking long term.
Day trading is like playing the lottery. Yes, one of the largest winning lottery tickets ever was recently sold in this area. But how many can honestly say that, over their lifetime, they’re in the black with their lottery ticket purchases?
A lot of day traders may be ahead today. But tomorrow and over an extended period of time I think most disciplined long-term investors will outperform most day traders.
Time is definitely on the side of the investor with a long time horizon.
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Ken is a registered representative of LPL Financial. Securities and financial planning offered through LPL, a Registered Investment Advisor, member FINRA/SIPC. Ken is Vice-President of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. LPL and Society for Lifetime Planning are independent companies. Investing involves risk including loss of principal. No strategy assures success or protects against loss.
