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The average investor made just 2.9% a year in the two decades to 2020…and most investors don’t even know it! They miss this silent killer in their stocks and have no idea why their portfolio goes nowhere!
In this video, I’ll show you the one thing holding most investors back from higher returns. I’ll explain the difference between short-term trading and long-term investing and then reveal three strategies to make money no matter what type of investing you do. We’re talking stock trading versus investing, today on Let’s Talk Money!
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Nation, according to data from the New York Stock Exchange, the average investor holds their stocks for just five months. That’s a new all-time low, down from a holding period of eight months as recently as 2019 and a high of eight years back in the 60s.
And as a result of this short-term, trading mentality, the average investor has earned just 2.9% annually over the last 20 years. JP Morgan studied investment returns and found the average investor made just 2.9% a year. That’s versus a 7.5% annual return on stocks in the S&P 500 and even below the safe bond portfolio that returned almost 5% a year!
And if those numbers don’t scare you, think about this. Investing just $500 a month and getting that market return of 7.5% would get you to almost $260,000 in 20 years. But if you made the mistake that most investors do, and only get that 2.9% return, you’d be left with just $159,000 in that time, a difference of almost exactly $100,000!
And it’s not because investors are trading in and out of stock…it’s because they’re doing it THINKING they are long-term investors!
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Let me rephrase that because it’s the single biggest message of this video, the one thing I want you to remember. Nation, long-term investors will make money. Short-term investors and stock traders will make money. The people that will not make money, are the stock traders that think they are long-term investors.
The average investor costs themselves over $100,000 because they don’t know what type of investor they are!
So I want to start off explaining the difference, showing you what it means to be a short-term trader versus a long-term investor and how to know when you’re trading instead of investing. I’ll then show you how to pick the strategy right for you and then three ways to invest.
It’s part of a special workshop I put together with Thomas Carvo on stock trading and technical analysis, 35 videos and more than four hours of instruction on the stock signals you need to know. You’ll learn everything from trading time frames to using stock charts and finding the trends that send stocks higher. You’ll be able to download a trade journal template along with a trades cheat sheet and lots of other bonus material. We just launched the workshop last month and offering a special 35% discount, more than $150 off, to everyone here in the community so check out the link I’ll leave in the description below.
Here I want to start with the difference between short-term stock trading and long-term investing because it’s not as obvious as it may seem. Investors may say they’re in a stock for the long-term but their actions of buying and selling paint an entirely different picture and being successful means using an entirely different set of tools.
Long-term investing is about analyzing the fundamentals of a company, looking at the industry and competitive landscape as well as the financials like sale, profitability and cash flow. You’re buying stocks of companies to get an ownership stake in the earnings because you think they’ll be higher over the next three or more years.
Short-term stock trading has much less to do with the fundamentals of the company and more to do with swings in the stock price itself. Here you’re focused at patterns in the stock price over the last month or even down to the hour and trying to get a sense of investor sentiment in the shares.
Now that last piece is hugely important so I want to repeat it. With stock trading, where you might only hold a stock for a day, a month or even up to a year…the single biggest factor in the price is investor sentiment. You can have a stock with strong long-term growth but if investors are short-term negative then any news is going to be viewed through that negativity and the shares will struggle.
This is why it’s so important to know whether you are a long-term investor or a short-term trader in a stock. Long-term investors need to have the conviction in their analysis of those fundamentals, that even if short-term sentiment is negative and the shares seem to go nowhere but down, that the longer-term growth picture in earnings will win out.
Short-term traders on the other hand need to be watching the patterns in the stock price and what it says about investor sentiment. The problem here is a lot of investors say they’re in it for the long-term. They find a stock with strong growth and those long-term fundamentals but then negative sentiment pushes the stock price lower and they get spooked. They flip-flop and sell out of the shares within a month or two, taking a loss and thinking their analysis of the company was wrong.
Of course, the real kick in the ass here is that their long-term analysis was probably right but they didn’t give the company time to prove it. The sell at a loss only to see the stock jump higher over the next couple of years.
There’s nothing wrong with either of these two strategies, stock trading or long-term investing. In fact, the best strategy for some investors may be to do both and let me explain why.
The data is pretty clear that long-term investors, a strategy of buy-and-hold, tends to do better in returns. Even if you’re not Warren Buffett at picking those long-term stocks, you’re going to get closer to that 7.5% market return versus the 2.9% average return most investors earn. I would say short-term investing is more difficult as well. Besides the constant analysis of stock patterns, you’re dealing with lots of emotions and investor behaviors that can get in your way.
The problem is, one unavoidable force get in the way of investors enjoying that long-term investing strategy…themselves! Some investors have trouble doing nothing while a stock price drops, no matter how strong their conviction is in the long-term upside. Other investors just like that thrill of watching prices and booking those quick returns. If they can’t buy or sell something every week, they get itchier than a crack-head on payday.
That’s why you see the average investor getting just 2.9% returns, because they start as a long-term investor but end up buying and selling like a stock trader. They’ve used the wrong tools to analyze a stock and end up losing money!
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Now if this sounds like you…not the crack-head part but that itch to watch your stocks constantly and the nervousness around short-term price changes, then the solution may be to dedicate at least part of your portfolio to stock trading. Maybe you have seventy or eighty-percent of your portfolio in long-term investments, stocks you pick using that fundamental analysis and commit to holding for years. Then to scratch that itch, to take your mind off obsessively watching your long-term stocks, you use 20% of your portfolio for shorter-term trading. With this part of your portfolio, you use the short-term indicators and signals to trade in and out of stocks for those quick profits.
Now to totally screw with your mind, I want to highlight the difference between two types of short-term trading. Ah, you thought it was as simple as short-term versus long-term investing, you silly little sloth.
Just like the difference between long-term investing and short-term trading means using different tools to pick stocks, different holding periods in stock trading can also mean a different strategy in analysis.
In day-trading, you’re buying and selling a stock within the same day. Rarely will a stock trader even hold a position overnight.
This is going to be all technical analysis. Everything in day-trading revolves around the chart and patterns in a stock, and usually the shorter-term patterns at that. You’re positioning on a stock to bounce off its 10-day support or to weaken from short-term resistance.
A completely different type of trading is called swing-trading. This is where you might hold a stock for days, weeks or even as long as a few months.
Here you’re still largely trading off the short-term sentiment and signals you find in the price chart but you might also use some fundamental analysis as well. Most of the time here, you’re looking for stocks where the near-term direction conflicts with the longer-term fundamentals and you’re investing at inflection points. This might be anticipated news or earnings that will swing the stock in the other direction.
Just like the difference between stock trading and long-term investing, success using either of these two types of short-term investing depends on knowing which strategy you’re using and using the right tools.
Stop Losing Money Trading Stocks! This FREE Webinar will reveal three stock signals every investor must know. Space limited so click here to sign up!
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