As Financial Advisors we deal with a broad range of clients on an ongoing periodic basis who have various objectives and goals. Since the COVID-19 outbreak we have seen a meteoric rise in younger clients asking us for advice on whether they should go about Day Trading or Long Term Investing. Clients whose age demographic aren’t usually in tune with the financial world are becoming more and more interested in beginning their investment journey.
This is brilliant, as we all know, investing early and putting money away at a young age is the single greatest step you can take on your journey to a financially successful future. Taking advantage of compounding interest effects, long term investment horizons and reduced spending habits have caused a tidal wave of change.
Rise of the Day Traders
Online trading apps and platforms which we have all come to know, have helped increase the appetite for expediency among the younger generations. Slick interfaces, low charging structures and quick account setup times have opened the markets up to many. On the face of it, this is great, undoubtedly so.
The introduction of a new generation of investors into the marketplace now can reap all the rewards investing has to offer. Only the fact remains that many investors entering the investment landscape have done so with little to no previous experience. One key change is happening, many investors are interpreting “long-term investing” as “day-trading”. Day-trading should not be confused with long-term investing.
Day trading, as the name suggests, involves frequent buying and selling of stocks or investments on the same day. When the market opens, so begins the buying and selling. When the price of a stock changes to a point that is deemed favorable, the trader can make a profit, sometimes small, sometimes substantial depending on the stock and market price.
- Quick to set up an account, and low charging structures (depending on the platform).
- Little capital (money) required to maintain a daily account balance to trade.
- Significant gains can be made with the right trades over a short period of time.
- Disciplined and dedicated investors can be highly successful with the right financial analysis tools and a good understanding of how the markets work.
- More capital (money) required for those who wish to trade more frequently throughout the day.
- Hefty fees or commission may be deducted from profit made from each trade, sometimes costing you more.
- Trading most often requires a lot of time and attention, at least two hours each day. For the serious traders, around five hours each day.
- Running the risk of over-trading and doubling down on potential losing trades.
Long Term Investing
Long-term investing is known as the more prudent approach for investors. This method involves the buying and selling of investments over a period of years, usually longer than three to five years. Here, the investor will approach an investment company and sit down with a Financial Advisor to have a conversation about his or her plans for the future and what goals they aim to achieve in the long term. Why is this regarded the more prudent approach?
Its about planning for the bigger picture. A Long-term investor will often use this route with the intention to realize sustainable returns over a period of time and will rely on professional fund managers to actively monitor and manage the stocks on your behalf (at a reasonable charge).
The Advisor will take into consideration the investor’s personal and financial circumstances, assess and calculate the investment time horizon (term) and the level of investment risk he/she is prepared to take and that is required, and based on these factors, put together suitable investment solutions to achieve the investor’s goals or objectives.
- Option to invest a small amount regularly (monthly), or a larger one off investment.
- Asset class diversification to effectively manage investment risk (Equities, Bonds, Property, etc).
- Commission and charges are disclosed upfront and transparent to the investor. Financial Advisor fees can be negotiated.
- Suitable for investors who wish to invest long term and to achieve future financial goals.
- The outcome of staying disciplined and invested in the market over time (riding the waves of short-term volatility) has historically delivered positive and consistent “compounding” returns, with the investor always coming out on top.
- Financial Advisor fees, fund management charge, fund switches and trading costs apply (usually offset by fund performance over time).
- Not suitable for impatient investors who are looking for immediate returns.
- Historically, markets have been impacted by periods of downturns (capital at risk). Investors can make the mistake of selling out of the market, locking in investment losses.
What route should I take?
The key difference between day-trading and long-term investing is that one requires skill and attention, and the other simply requires patience. It really depends on your personal investment objectives, the amount of capital you have, your attitude to risk, and how much time you wish to dedicate to it. Many investors choose one or the other, some choose to incorporate both methods as an investment strategy. Its important to consider that you should never risk what you cant afford to lose. This is why it is recommended to assess your attitude to risk, and match the appropriate investments to your personal risk profile.
We therefore urge anyone who plans to focus their sole investment and retirement strategy on an online trading platform to do the proper research and due diligence that such an undertaking demands from you. If done right, this can provide great results.
Whether you plan to incorporate trading in a personal capacity with other investment strategies or plan to go it alone it is always worthwhile receiving impartial financial advice first.
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