Both investing and trading attempt to profit in the financial markets, so what’s the difference?

The conversation of trading has come up daily with clients, asking if they should set up their own trading account to buy Shopify, Tesla, Amazon and others.  Some of these stocks are up 300%+ in 2020.  Seems like good investments to me.

Disclaimer: I don’t advise on individual stock, so I always recommend you do your own research. 

The question is: Are you investing in these companies or trading their stocks.

Here is how Investopedia defines both:

Investing:

The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds, and other investment instruments.

Trading:

Trading involves more frequent transactions, such as the buying and selling of stocks, commodities, currency pairs, or other instruments.

So when you look at your portfolio, are you investing or trading?

In general, trading brings much more risk, volatility and ability to stomach the volatile markets.  Trading can also bring substantial short-term gains (Tesla is up over 300% on the year).

On the other hand, investing brings long term growth and wealth.  It is the boring way to do things, but statistically will bring more wealth to your portfolio over time.  Investing keeps you in the market during the good and bad – focusing on the quality of company you are invested in the and the dividends it pays over time. 

When you trade you are looking for short term gains.  If you hit it right, you will be a happy trader.  Hit it wrong and you will fear the stock market moving forward.

Investing is a buy a hold strategy, focusing on being in the markets to ensure we participate on the good days.

How important are the GOOD DAYS in the markets?

If you invested $10,000 in the S&P 500 on January 1^st, 1980 your account would have been worth $708,143 on January 1, 2018. 

But…

If you missed the 5 best days in the markets during that time your account would be worth just $458,476.  That is a 35% drop by missing just 5 days!!!

If you missed the 10 best days, it drops all the way to $341,484. 

Miss the 50 best days and you would have a paltry $62,342 after 38 years.

The takeaway from this is to understand that trading is for your fun money.  If you can’t stand to lose your money, then don’t trade in the first place. 

If you have an itch to trade (which it seems like many do - Robinhood trading app in the states had over 2 Million new accounts opened in the first quarter of the year) set aside a small amount of money you can lose.  Open a Wealthsimple Trade account and go crazy.  But expect to lose it all, and hope to hit a home run.

If you are saving for retirement, take an investment approach (like we do for all our investment clients) and hire a professional to manage your portfolio. 

Happy Trading / Happy Investing