Are you an Investor or Trader? (The Pros and Cons of each Strategy)

“Should I be an investor? A trader? Or both?”

This is a question that I get asked all the time.

But before I begin, I should add that personally, I’m in both camps – investing for the long-term as well as trading for the short to medium-term.

Where do you see yourself?

I really believe that it comes down to your passion, and your time commitments.

To help you decide which camp you fall into, I’m going to walk you through 3 advantages and disadvantages for each strategy.

Long-Term Investing – The Disadvantages

1. Slow Feedback Time

One of the disadvantages of longer-term investing is the slow feedback time, which doesn’t actually let you know whether you’ve made the right decision until months and in some cases, years later down the track.

2. Opportunity Cost Due to Long-Term Capital Commitment

Secondly, there’s that long-term capital commitment, which means that potential opportunity cost does come about. Because your funds are in a sense ‘locked in’ for a longer period of time, they now can’t be committed elsewhere even if the opportunity arises.

3. You Can Become Too Comfortable

And lastly, you may have heard of the term “bottom drawer stocks“, which basically means buying into strong, reliable stocks with a long-term growth horizon that you can ‘forget about’. While this has the appeal of not needing to constantly be monitored, it also means you can actually get too comfortable and hence never review any of your investments made in a timely manner.

Long-Term Investing – The Advantages

1. Lower Transaction Costs

On the other hand though, investing also has its advantages. The first one is that you incur much lower transaction costs — costs to buy and sell are minimal because of that inactivity.

2. Lower Risk Due To Less Entry/Exit Timing Pressure

Secondly, due to its longer-term nature, there is inherently lower risk, as the timing of the entry and exit of investments isn’t as vital compared to active trading.

3. Less Time Commitment

There’s also much less time commitment, with just a simple weekly or even monthly review being adequate.

Short to Medium-Term Trading – The Disadvantages

Let’s now get into the trading disadvantages.

1. Higher Transaction Costs Due to Higher Frequency

Firstly, trading will incur a much higher transaction cost due to the higher frequency, although this can be minimized by choosing the right online discount broker.

2. Psychological Taxing / Mentally Draining

Secondly, because you’re now making decisions much more often, it actually can be psychologically taxing through emotions, especially when you get things wrong, which will happen quite often.

3. Much More Time Commitment

And lastly, while we mentioned that there is much less time commitment required for investing, trading is on the opposite end of the scale. There is much more time required because now you need to keep abreast of current market conditions, events, and also individual stock news.

Short to Medium-Term Trading – The Advantages

1. Faster and More Frequent Feedback

Firstly, if you like learning, trading will speed up that learning process as the feedback of trades placed can be in a matter of days and weeks, rather than in months or years like investing.

2. More Flexibility with Timing Entry/Exit

Secondly, you’ll find an immense amount of flexibility to enter and exit according to technical rules and market conditions. And even have your entire portfolio converted back into cash if the market dictates this.

3. More Opportunities and Better Returns

And finally, the biggest advantage that you’ll find is that you will be better rewarded as you find that opportunities are in abundance, and hence you can choose and pick the very best that fit your criteria and rules. The reason for this is because you can always exit a position of one trade to re-allocate your capital to another opportunity that presents itself.

So… should you be an investor? A trader? Or both?

So now that you’ve learned the advantage and disadvantages of both longer-term investing and short to medium-term trading, the question is — where do you see yourself?

Which strategy resonates more with you?

In my opinion, the majority of people I believe will be sitting in the investing camp and better off investing rather than actively trading short term.

Personally, I began as a long-term “Warren Buffet-style” value investor. But as time went by, I progressed into the short to medium-term trader that I can today.

➔ Related Post: Is Fundamental, Technical, or Macro Analysis Best? (My experience with all 3 strategies)

I always say to those who want to trade, to invest first if you have never invested in your life. This will give you the confidence to progress towards trading for a living.

There really is no shame in being a long-term investor, because you can do quite well just through investing (if you do it right).

You just need to look at Warren Buffett for example. I’ve learned that finding and keeping long-term great stocks is a great way to build wealth, and at the same time, trading a diversified portfolio of strong, stable stocks can also generate a higher return, as money is used more efficiently since there is no longer that opportunity cost of not being able to purchase something because you’ve got long-term commitments elsewhere.

So I really encourage you to look really hard at yourself because I simply believe that your success in the markets depends primarily on marrying your personality and deciding if you want to trade, invest, or both.

You really will thank yourself for taking the time out to analyze your personality, what strategy suits you best, and sticking to it long-term.

Terry

P.S. Regardless of whether you choose to invest long-term or trade short to medium-term, there are tools you can use to maximize the effectiveness of your strategy – tools such as being able to anticipate and prepare for a market crash around the corner, or knowing which stocks are stronger and more reliable. If you’d like to learn those tools, I’d like to invite you to attend my next online Masterclass.