As Steve explains in today’s Two-Minute Retirement Solution, trading and investing are two different things.
And no matter how disciplined you think you are, getting caught in between can be disastrous for your retirement.
TRANSCRIPT:
One of the costliest mistakes a person can make is confusing investing with trading. It can sink a retirement.
In the simplest terms, investing implies a long-term commitment to a company. “Long term” is of course a relative term, but most professionals consider it a minimum of three to five years.
Trading is more short term – hours to maybe months.
If the distinction ended there, we would have fewer people racking up big losses on trades. But it doesn’t.
There are many levels to this distinction that can trap the unsuspecting small investors who just wanted to make a few extra dollars on a quick trade.
Long-term investing also implies a certain level of confidence in the long-term performance and growth of a company. So, if the price drops, the long-term investor normally averages down his costs by buying more.
Yes, I know there are also pitfalls in the “averaging down” concept, but bear with me on that point for this example.
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The idea is quite simple. As time goes by, the solid fundamentals that drive investors to a company will bear out, and they will make money at some point down the road.
It’s a simple and solid concept that works as long as you do your homework and can keep from panic-selling when the market tanks, which it always will.
Trading isn’t magic either. A trader buys a stock for a specific reason – earnings, new products, etc. – something that is supposed to happen in a certain period of time. And, if the event unfolds the way he thought it would, he sells for a profit. If it doesn’t, he sells then, too.
The problem most small investors have is they don’t sell when the short-term event doesn’t pay off. As the stock drops, they average down on what was supposed to be a trade. They get into a costly gray area and it rarely, if ever, works.
This is how big losses are racked up in what was supposed to be just a few bucks on a gamble.
Traders take their short-term gains and losses and move on. The “in-between” traders and investors average down and almost always increase their losses.
And everyone starts out saying the same thing: “I’ll just risk a small amount.”
That quickly turns into too much in a risky play and, over the years, these so-called quick trades add up and can sink a retirement.
Trading is great if you have the discipline to take your profits – which is the toughest thing for most people to do – or get out if it doesn’t work. Get caught in that gray area between trading and investing, and you are in for a world of hurt.
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