4 Reasons Why Long-Term Investing Is Better Than Day-Trading
I met someone new over the weekend and we talked about what each of us are doing for a living. When I told him that I was an investor, he jumped in with a response of, “So you are a trader!”
I had to spend the next 15 minutes explaining to him the difference between investing and trading.
The encounter made me realize that many still view trading and investing-based-on-a-stock’s-business-fundamentals as the same thing. They are very different things.
At the Motley Fool, we are all investors who invest by studying a stock’s business fundamentals. We believe in investing for the long-term and in companies, rather than trading in and out of a stock ticker.
Here are four key reasons why I think long-term investing is better than day-trading.
You control your own timing
As a long-term investor, I can control when I want to conduct research on a company or perform a portfolio review. But if I were a day-trader, I would have to work once the market is open. Since a day-trader would need to monitor the market constantly, won’t it feel more like taking on a second job instead of letting your money work for you?
Brokerage fees…? What brokerage fees?
I typically make about 10 trades a year using an online brokerage firm. I may reinvest some of my dividends in a new and interesting company I’ve researched on. Or I may sell some of my investments that have turned out to be mistakes. In all, I spend less than S$100 in brokerage fees a year in general.
If I were a day trader, I would have to make multiple trades each day the market’s open. This would likely bring me to thousands of trades a year – in such an instance, the brokerage fees could easily add up to tens of thousands of dollars annually.
There’s an old piece of wisdom that goes, “A penny saved is a penny earned.” Day-trading would certainly not help someone save on brokerage fees.
Investing can be less risky
There’s no need to depend on leverage when investing for the long-term. That way, the most you can lose is what you have invested.
That’s not the case for day-trading. Many day-trading strategies involve the use of leverage to make the trade profitable. So theoretically, if I am a day-trader, I can lose more than what I have in the bank.
Day-traders are competing with professional high-frequency traders
A day-trader would need to compete directly with professional high-frequency traders (HFTs). These are organisations with super computers and superior technologies that can perform trades in a matter of milliseconds or less. A blink of a human eye takes 300 to 400 milliseconds – this means HFTs can execute trades faster than we can even blink. That’s hardly a fair fight for day-traders.
But for long-term investors, millisecond trades are simply irrelevant. Over the long-term, it is the performance of a stock’s business that matters.
A Foolish summary
Trading is popular in the stock market. For many, it is fun, exciting, and has the lure of the “promise” of fast riches. But, as the fable of the tortoise and the hare goes, it is slow and steady that wins the race.