Don’t Treat the Market Like a Casino
This happens much rarer now due to the pandemic, but when I used to socialize more, because of my line of work, friends and acquaintances often asked me about the stock market.
The one thing that still makes me shake my head to this day is how some of them think of the market like a casino. For the ones whose knowledge of the stock market comes from depictions in movies and TV, they seem to expect to either make a boatload of money in a week or lose it all. It’s clear they aren’t talking about investing. They are just talking about gambling.
Stocks Are Profitable
Yes, it’s certainly possible to make or lose a lot of money, sometimes quickly, in stocks. However, if you are in it for the long haul, the stock market is consistently profitable over time.
Over the last 15 years, even though we’ve had some scary crashes like the financial crisis and the COVID-19 crash earlier this year, the S&P 500 has returned about 193% (including dividends received) since the end of 2005. That’s a near tripling of the original investment. Annualized, that’s a return of 7.4% per year.
And if you bought an S&P 500 index fund at the beginning of this year, even after the February and March collapse, if you held on, you would still be up today. You would have lost money only if you sold as the market was falling and didn’t come back. Those who bought quality stocks during the COVID-19 crash are sitting on big gains now.
I stress the word “quality.” Not all stocks are equal. You can’t invest in a lousy company’s stock and expect to make money. Ask people who bought Sears stock as it was going down if “buying low” turned out to be a good idea. Just because a stock is lower doesn’t mean it’s a better buy. You still have to analyze the underlying company.
Many newbies lose money because they don’t take the time to do their homework and risk their money without knowing exactly what they are doing. For example, they might chase a hot stock because their neighbor told them about it even though they don’t even know anything about the underlying company. That’s like dropping coins into a slot machine or playing three card monte.
Remember, it’s your money, you should always be mindful of how you are using it. People interested in investing should take the time to learn as much as possible about the market and about different trading and investing strategies.
Keep in mind that trading and investing are two different things. Yes, the underlying goal is to make money, but how you go about it is not the same. The key difference is in the time horizon.
Investing vs. Trading
When you invest, you want to put your money in solid companies and you are in it for the long haul. Typically, you spread your money over stocks in different industries (called diversification) and let the portfolio grow over time. As discussed above, even if you only bought an index fund 15 years ago and just let it sit, you would have a very solid return today. And if instead of an index fund, you did your homework and found some good stocks, you could have a much nicer gain than that.
On the other hand, when you trade, you are looking to find stocks that can give you quick gains in a short amount of time, taking weeks and days (perhaps even shorter) instead of years. With trading, the fundamentals of the underlying company are less important than having the ability to see trends that can benefit you. Timing is everything. No matter what, though, you still should have rules and strategies in place to stay disciplined so emotions don’t get the better of you.
Of course, there’s nothing wrong with investing and trading at the same time. One common strategy is to reserve a certain percentage of the portfolio for core investments, and use the remainder for trading in pursuit of bigger and quicker gains.
Editor’s Note: In the above article, our colleague Scott Chan provided basic insights into investing. Whether you’re a beginner or a veteran at investing, it’s always helpful to be reminded of the essential rules of Wall Street. However, we’ve only scratched the surface of the expertise on the Investing Daily team.
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