It has often been said that “If you watch water, it will never boil”. This principle could certainly apply to investing. When you are constantly monitoring ever upward or downward move in your investments, you are not likely to see many of the positive results you are looking for. It can easily be said that investing is more profitable than day trading for the vast majority of individuals, particularly those just getting started in the market.
Just some of the facts
Anything worth doing in the investment world is worth doing for money. If you are not able to make a reliable source of positive returns from something you are doing in the investment world, then it is probably best to cut your losses and run. Thus, any reasonable person would take a look at the different types of investment strategies from a viewpoint of how predictably profitable they can be. This is exactly what Business Insider did recently. They looked through academic studies and found that at least eight in ten day traders lose money at what they do. Those same studies often found that one percent or less of day traders are able to achieve what they call “predictable profitability”. When we compare this to the massive amount of people who have been successful and have even paid for their retirements off of long term investing, it is easy to see how one is superior to the other. With these kind of numbers, one might wonder why anyone would think that day trading is a good idea.
The psychology of day trading
Many have put forth the suggestion that day trading may be particularly appealing to some people because of how it is portrayed in the media. Numerous movies and television shows depict day trading as something that is constantly exciting and profitable. They give you the idea that just about anyone can get involved with this industry and be successful. In short, they give you a false sense of the risk versus reward scale involved with this type of career. They tend to show the person who beats the odds and makes a living rather than the thousands who fail trying to do so. The same factors that make individuals believe that they could be the one that wins the lottery propel many into the world of day trading.
Why long term investing is better
Long term investing is better for all investors because of the huge reduction of risk compared to day trading. When someone invests in a diversified basket of investments over the long run, their odds of making stable and respectable returns over the long term increases dramatically. Long term investors get to take advantage of things like dividends, which allow them to have their money growing on itself. Dividends are paid out to those who have been faithful holders of certain stocks that pay these dividends. Day traders could never take advantage of this, because they are in and out of a stock too quickly to realize these benefits. Aside from the fact that day traders can’t get dividends, they are also going to have to figure out a way to overcome massive commissions. Remember, every time you make a trade, you have to pay a commission to the broker that makes the trade for you. This is usually a small amount of money, say ten dollars or so. To the long term investor, this is barely a blimp on the screen, but to the day trader, the cost of commissions is magnified. The day trader is trading in and out of stocks all the time. They have to pay commissions on each one of those trades, even the ones that they lose money on. In the end, this is one of the main things that buries many of the day traders.
With all of the evidence that day trading does not work, it is plain to see that long term investing is simply the way to go. Personal experiences of millions of individuals, facts and figures, and even academic studies are all pointing in the same direction. Investing trumps day trading.