Active Trading vs. Long-Term Investing

(Go Long!)

Why do you want to invest? If your answer is, “To make money fast!” then you might want to think again. Despite the way the stock market looks in the movies, most investors are not in it for quick profits, but rather for long-term financial security.

Active trading means that you (or your broker) buy and sell continuously to try to maximize your profits. You might think that the more you know about how the market works, the better you’d be able to pick winners, but the truth is that even seasoned investors can’t predict who will come out on top at any given time.

Believe it or not, most investors can make just as much money — or more — with a boring, passively managed portfolio adjusted once a year as they could with a heavily managed portfolio that is constantly buying and selling.

You certainly can play the stock market for fun, but it’s best to keep that money separate from your nest egg. The real big bucks come from making regular contributions to risk-appropriate investments over long periods, like 20 or 30 years.

INVESTING FOR THE LONG-TERM

Time is your most valuable resource as a young investor. The first 10 years of your career are critical if you want to make the most money possible in the stock market, thanks to compound interest. The longer your money has to grow in your investments, the more you’ll probably have at the end.

You will get the highest returns if you …

  • Contribute as much as possible (10% of your income)
  • To an investment portfolio adjusted for your age (riskier when you’re younger, safer as you age)
  • And slowly contribute more each year (5-10% on top of the prior year’s contribution) for 30 or 40 years.

Your 401(k) or other workplace retirement plan is probably your best tool to start investing. Work plans are great because they do all the administrative setup for you. There’s usually no minimum investment. You tell your employer how much to take out of your pay, and then you choose from their brokerage’s investment options. It’s an even better deal if your employer matches your contributions.

If you don’t have a plan at work, you can open an individual retirement account (IRA) through a traditional brokerage, but you may need a minimum amount to get started.

INVESTING FOR FUN

While picking stocks is not a guaranteed strategy for beginners to build long-term financial growth, it can help you better understand how the stock market works — especially if you invest money that you don’t mind losing.

Through microinvesting, some apps let you buy fractional shares of stock, so you don’t even have to save up to afford whole shares anymore. Robo-advisors and traditional brokers offer user-friendly options for investments, sometimes based on your risk tolerance (very safe to very risky), your specific goal or even your social values.

Before buying shares of a mutual fund or hiring a broker, read their philosophy. What is their strategy for growth? What benchmarks do they use to assess their progress? What is their success rate?

Once you start to get comfortable with basic investing concepts, use what you’ve learned to better understand your retirement portfolio. Investing is complicated, so don’t try to figure it all out at once. Give yourself — and your money — time to grow.

As always, we’ve got your back. — The On Your Own Team End of article insignia



[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by On Your Own, the National Endowment for Financial Education or any of its affiliate programs.]