Some investors think that short-term stock trading will lead them to quick profits, but the opposite is more often true.
Many investors have guessed right about a coming trend at one time or another. Maybe they bought just prior to a big upswing, or sold in advance of a major stump. In the long run, however, these experiences may wind up costing them money. They may bet twice as heavily on the next trend they foresee, with more volatile stocks, only to discover their forecast was 100% wrong.
When investors base buy and sell decisions on short-term stock trading forecasts, they often experience notably poor investment results, or even lose money. This may come as a shock to them. In hindsight, it may seem that past market trends, up or down, should have been easy to foresee. But in fact, nobody consistently foresees these trends. That’s why most investors hurt their returns if they let short-term market forecasts have much of an impact on their investment decisions.
Studies show that short-term stock trading leads to losses
Studies by the Dalbar organization show that if investors do a lot of in-and-out trading, they routinely make only about one-third of the return they could have earned with a simple buy-and-hold approach.
According to research on top-performing mutual funds, most of their investors lose money or make negligible returns. Why? That’s because most of the investors in a top performing fund only buy into the fund after it has already made big gains. Investors also tend to sell former top-performing funds only after a major slump in the value of the funds’ holdings. When you chase investment performance, it’s all too easy to buy at the top and sell at the bottom.
Here’s an investor saying you should always keep in mind: “If it was easy to predict which way the market will go, why would anybody work?” In fact, it’s hard if not impossible to consistently profit from short-term trading. That’s due to the large random element in short-term market trends.
Market volatility and short-term stock trading
One thing to consider about short-term investing is the market’s volatility. When volatility is heightened, it makes it harder for in-and-out traders to make money.
There is no denying the immediate appeal of taking a fast profit. However, most Successful Investors find over long periods that much of their profit comes from a handful of their best investments—stocks that went up much more than they ever expected. If you are too quick to take profits, you’ll wind up selling your best picks when they are just beginning to rise.
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Brokers may have a vested interest in recommending short-term stock trading
Investors may try to improve their returns by taking money out of the stock market when they feel risk is high. They often get this urge after a few weeks or months of bad financial news or unsettling political developments.
By then, however, the market may have already dropped far enough to offset any negative developments. Often, these temporary sellers wind up buying their way back into the market when the news has improved and stock prices have gone well above the price where they sold.
All too often, brokers encourage this short-term investing strategy. They may advise clients to “take some money off the table,” setting up a false analogy between investing and gambling. That’s in a broker’s interest, but not yours.
Every sale generates a commission, which goes to the broker. It also gives the broker the opportunity to sell the client something new and make another commission.
The investor may re-invest in a product that’s more profitable for the broker—selling the proceeds of a stock sale to buy an annuity or a universal life insurance policy, say. However, investors at discount brokers also manage to sell low and buy back high, without any broker encouragement.
Short-term stock trading can lead you to take on heavy risk
Many investors do this in hopes of quickly reversing the losses they experience during market downturns. It’s a natural temptation in troubled times.
You may have noticed a lot of ads for courses in online, short-term stock trading or foreign-exchange trading. The promoters are aiming their pitch at inexperienced investors who have suffered losses due to market volatility. These investors may be inclined to follow the example of desperate gamblers who bet their last few dollars on a handful of lottery tickets, or a long shot at the track or the casino. That’s a wasteful example to follow.
Short-term stock trading and short-term predictions
To succeed as a Successful Investor, you need to get used to the idea that short-term declines come along unpredictably. These declines are common enough that investors continually think about them. But they are far less common than the predictions that the next one is right around the corner.
Have you found success in short-term trading? What strategies have you used for this success?
You can get lucky in short-term trading, but it’s usually a path to loss for most investors. What would make short-term trading worth the risk for you?
