Are you in it for the long run or the quick buck? That’s the question you as an investor have to ask yourself before putting your money to work. Just like the hare and the tortoise, a steady pace will often outpace the rushed approach.
In fact, there are various ways of investing your hard earned cash; from speculative to risk-averse, from seconds to minutes and days to years. Some investing strategies even combine the advantages of the pace of both hare and tortoise. Whatever approach you favor, there are advantages and disadvantages.
Short-term versus Long-Term Investing
Let’s first see what we are dealing with in either scenario. Short-term investing includes day trading (selling and buying within the same day; often even within minutes) as well as investing for only a few days, weeks, or months. Long-term investing is taking a multiple year approach. You invest in a particular share for more than 12 months and are willing to stay invested for even longer if the share performs according to your anticipation. Long-term investors ignore short-term market moves and are willing to endure brief downturns. Different from short-term investors, their long-term peers are generally more likely to benefit from dividend payments.
The Costs and Risks of Short-term Investing
Most investors take a rather longer sighted approach to investing; particularly amongst private investors. For good reasons: There are a number of drawbacks when investing within a short-term horizon: costs, the associated research work, and the rather speculative nature of short term investments. Imagine buying and selling a few times a day: It is highly cost intense. Each trade creates costs. Even though your brokerage firm might offer a discount on heavy trading, that is numerous trades per day or week, the costs are still significant and can only be justified if your trading volume is high enough. If you are investing only a few thousand, the costs and risks are hardly worth the effort.
Risks are indeed one of the main differences between short- and long-term. A short-term horizon is more prone to failure. The stock market is nothing but a casino when assuming a short-term approach. In fact, more often than not short-term involves numerous psychological traps. As an individual investor you are not only competing against major banks whose computers and algorithms play the casino in nanoseconds, but also your own mental strength.
Decisions by the individual investor are formed amid an overload of information and herd psychology. The market might collapse one day, because a particular price has been reached consequently triggering computer systems to buy or sell, independent of any human interference.
The psychological pressure for an individual investor and the never-ending inflow of information may become overpowering and lead to irrational decisions including selling at a loss despite potentially holding a good and solid investment, only to re-buy at a later point to rectify the decision and to compensate for a loss; all in the hope of an uplift in the market. Similarly buying at a higher price fed by a short-lived hype in the market followed by a collapse in the market may lead the speculator to sell at a loss instead of waiting for the next uplift in the market; only because the horizon is too short.
The Fun in Short-Term Investing
But then again, short-term investing is exciting and can bring in quick bucks. However, there is little to no ability in speculative investing. It is in its truest form a gamble. There are undoubtedly times when a quick return is realistic and market movements somewhat predictable. However, even then the market might take a different direction than anticipated. A well-researched investment allows the necessary flexibility to transition from a short- to a long-term stance if things develop differently from what you had initially expected.
A recent example of how important research is when shifting between short and long-term investing were oil companies. With the strong declines in oil price and the subsequent bearish effect on companies that are active in drilling, refining, transporting or distributing oil, the month of December 2014 turned out to be a specifically good time to invest in oil companies. It was a fantastic short-term bet, as the prices had taken a massive hit and a rebound was certain. In addition it was a fantastic long-term investment opportunity, as the oil price was bound to climb again; with particular potential after the quick and significant drop in the prior weeks.
Thus, hedge your bet by doing proper research. A plan B will save you a lot of grief and hassle. Instead of trying to read and react to momentary movements, enjoy the gamble, and it all falls, sit back and relax. Your investment, if researched, will merely turn from a potential quick buck into a long-term investment.