Updated: June 28, 2023
Many people don’t know that investing is different from trading. Investing is long-term, which means you buy, hold, and sell after several years or even decades. Trading is short-term, which means you buy and then sell only after a few days, weeks or months. In forex, some traders buy and sell only after a few seconds, minutes, or a few hours.
Because of the difference in time frames in which money cycles, effective strategies involved in investing and trading are also different.
For example, cost averaging does not work well with trading, because it’s a strategy designed for investing; the same way that price momentum analysis is more of a trader’s tool rather than of an investor.
Unfortunately, many people don’t know who they are – an investor or a trader. And thus, they sometimes apply the wrong strategies in what they’re doing, which causes them to lose money and consequently, feel stressed about the market.
I’ve seen so many people lately who believe they are investing in the stock market, but are actually trading. This misalignment in mindset and action will be the main reason why most of them will lose all their money within the year.
The allure of trading is very high, primarily because many find investing too boring.
There is a sense of exhilaration in trading, and a more heightened feeling of self-satisfaction when you make money.
Additionally, some traders consider time as more valuable than money. And they argue that if an investment fails, you didn’t just lose your money, but also several years in waiting to see that result.
But if you lose a trade, only a little time is wasted, and you can immediately refocus your efforts to gaining back the money you just lost. On the other hand, investors claim that risks are lower when you invest as compared to trading.
Since you know you’re in it for the long-term, you’ll most likely choose investments whose outlook is good for your time horizon. Moreover, investing requires much less effort.
It’s a “set and forget” process, and when you compare it against trading, which requires “continuous tracking”, then time is not actually wasted, because you can still focus on making more money while waiting to see the result of your investment.
Are you an investor or a trader?
How do you know if you’re more suited to be an investor or a trader? Take this simple test to find out:
1. If I were to give you money, which would you prefer?
a. Receive P500 every month for 3 years.
b. Receive P12,000 now.
2. If I were to ask for payment to read this blog, which term would you choose?
a. Pay P100 per article.
b. Pay P15,000 now for unlimited and lifetime access to all the articles.
Think hard about your answers and then read below.
If you answered “a” on both questions…
Then you are better suited to be a long-term investor. Cost averaging on the stock market is a good strategy for you to build wealth.
If you answered “b” on both questions…
Then you have the attitude of a short-term trader. You like making money fast, and you don’t mind taking big risks. Forex trading may just be your thing.
If you answered “a” on Question 1, and “b” on Question 2…
Then you’ll probably enjoy either being an investor or a trader, or both! A good strategy for you might be to trade stocks or currencies, then funnel your earnings there towards investments.
If you answered “b” on Question 1, and “a” on Question 2…
Then you’re like most people who prefer making a lot of money fast but are afraid to take risks. You can be a medium-term investor and put your money in moderate-risk instruments such as balanced funds.
It is important to remember that the rate of yield is always directly proportional to the risks involved. This means if you want to make lots of money fast, then you have to be willing to lose lots of money fast as well.
Alternatively, if you can’t take losing money in an instant, then you have to be content at making a modest income at a slow and steady pace.
Please note that your results on this test are not an accurate determination of whether you are an investor or a trader. But it is a good way to have an initial evaluation of yourself, so you can take further steps towards the right direction in learning who you really are.
A Good Balance
Being an investor is not necessarily better than being a trader, or vice versa.
I believe it’s always healthy to be a little bit of both – that’s why I invest in the Philippine stock market and also, trade the U.S. stock market.
However, before working on achieving that “good balance” – it is important, first and foremost, to get a clear understanding of the type of person you really are.
If you believe you’re an investor, then train yourself to be patient and persistent, but don’t be afraid to do a trade once in a while.
If you’re more of a trader, then nurture that passion and hone your skills, but don’t forget to regularly invest for the long-term.
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Photo credits: Baron Visuals and David Paul Ohmer
Hi Fitz!
Help! When I have money for buying stocks, I cannot help myself from spending everything in a week. I find it hard to divide the money into months and do cost averaging. But I only buy stocks that are still at buy below prices. It’s just that I cannot stand it when I still have money available in my portfolio. Parang nasasayangan ako if the money is just sitting there. Is this dangerous?
Nice article Fitz!!
Hi Ada,
I’m a young investor at say 3-4 months old. I also feel the same when say, I receive money to invest in stocks. Why don’t you invest small amounts, like schedule your investing? In COL you can schedule your investing periods. Sort of a reminder. Or if you are old school, just put it in your calendar. Just come up with a specific amount that you will invest monthly or quarterly and stick to it. 🙂
Happy Investing!
Im new in investing..i have a citisec account and a mutual fund portfolio. My understanding is that you earn thru capital appreciation.my querry is, are there any investment portfolio in the philippines which yields compounded interest?
Emman, i know MFs and UITFs use the principle of compound interest
Wah! I initially answered 1a and 2b then figured 1a 2a might be better.
Apparently I’m an “investor”
Though right now I’m actually both. I’ve got an index fund, but I’m also stock trading on the side to augment my savings and help raise capital.
@ada
it’s only dangerous if you’re using your savings or emergency fund already.
A good way to avoid this or feel at ease about this is to practice the envelope system. Make sure your building your emergency fund, keeping enough money for bills and living expenses. plus a little nest egg for rewarding yourself or going out with friends from time to time. Whatever is left can be used entirely for your investment plan – and if it so happens that your entire investment plan is to buy stocks, then I guess that’s ok. Although it would be better if you could also diversify (ex: TDs, money market funds or bond funds)
@ada
When you’re buying stocks at below prices, you’re actually “trading”. Cost averaging, in its strictest sense, requires no market timing – you just buy when it is time to buy. That’s why companies good for cost averaging are usually those with long-term growth potential or “GEMMS” companies.
However, there’s also what they call “Strategic Averaging Method” which is a modified cost averaging strategy. You buy below prices and continue to buy until target price is hit, in which you sell everything. This lasts for around a year or two.
In both averaging methods, it is really required that you invest a fixed amount.
My advise to you, if you really want to “invest”, is to set a fixed amount. It’s okay if the frequency is not the same, as long as the amount is constant all throughout.
For example, P10,000 is your amount. It’s okay to buy P10k worth of stocks today, then do it again after 2 months, then next month after that, then 4 months after that.
Again, how frequent you invest is not so important, what’s necessary is you put in a fixed amount of cash each and every time.
@emman, Carl
UITFs and MFs, as far as I know, earn only through capital appreciation. They don’t earn through the traditional compound interest, which you get through a revolving time deposit.
However, many say that although it’s capital appreciation, you are nevertheless, “compounding on the value” of the fund by staying in it. Because the higher the fund volume, the more likely others will join in, and the more money that they can invest, which then increases the likelihood that the NAV will increase.
@Carlos
Thanks for sharing your answer. So how’s your stock trading? How long do you usually hold a trade?
I’m doing a three-strategy combo in my stock market portfolio since 2011. I always keep 6 companies where the first 2 are my favorite companies dedicated for long-term investing. (purpose-retirement)
And then I do strategic averaging method for my next 3 companies. The combination of these 3 companies are constantly changing as I sell one or two of them upon reaching the target price. (purpose-to raise funds for a planned business in a couple of years)
And finally, I allocate one slot in my portfolio for active trading. I hold on to it for 4 to 6 weeks. Although sometimes i tend to get crazy and dabble on day-trading.(purpose-to party! :P)
The last two strategies have been effective for me so far while I expect my 2 favorite companies to grow at its biggest potential and support my finances upon my retirement years.
Aside from the stockbroker’s scheduler, one of the simplest and most powerful tools that I use to track my trades/investments is the MS Excel.
Hi Burn,
Thanks for sharing your strategy. That’s also what I do except for the active trading part, that one I do in forex, which I find more “exciting”, my trades there only last for one or two days. Some, just a few hours.
Hi Fitz,
Trading has been exciting! Even though I usually hold for months at a time.
I’m trying to learn how to do swing trading and momentum trading, but it’s complicated. So I just invest in dividend-paying blue chips with good charts right now.
Your Forex sounds more exciting though:D I can’t imagine trading in just a few hours. Exercise muna ko, baka sobra na yan para sa puso ko hehe
Hi Fitz,
Is it a good idea to reinvest your earnings from stock trading to long term stock investing or other investment assets? Say , you hit the target price but realize don’t have current needs yet for the money, any suggestions where to park it to preserve it?
Greetings Mr. Fitz:
What is your take on the up coming May Elections with regards to the economy and business investments?
Will it have an impact and affect the market?
Just curious on your analysis, since the market has been doing great hopefully it continues, but every time our country under goes elections every thing becomes tensed and unpredictable…
So will there be a drop in the market performance if there will be a change in the country’s leadership and government…
I hope no panic over the market…
And investments will still be better this 2013 …
@Carlos
If you’d like to try forex. I suggest you sign up for a demo account first. My forex broker is FXCM if you want to try, but there are also other online brokers that are good.
@MC
Yes, that’s a good idea. However, if you’ve been able to consistently make money from trading, then it might do you well to increase your “trading fund”.
This means, you can put 50% of your earnings to long-term investments, and the remaining half, back into your trading fund.
The percentage depends on you, the 50% is just an example. Personally, I don’t have a consistent percentage, but my range is 40% to 70% trading net income is funneled to long-term investments.
@java
I’m not a political analyst but in my opinion. The market will slow down as the elections draw nearer, it might also correct (go down a little).
But since it’s not a presidential election, there will be no significant impact as long as the elections go smoothly and peacefully. When that happens, investor confidence will continue and markets will retrace (go up again).
If anything “bad” happens during the election that could “scare” investors, then we’ll see further correction until the end of the year, which can always be reversed by the government with better than expected economic data releases.
Again, this is just my personal opinion. If there’s an expert reading this blog, I hope they can comment and share their thoughts on this. 😀
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THANKS sir fritz….your blogs are one of my daily bread..
Your ideas really help me a lot to have a financial knowledge on how to set my life from debt…and giving me a courage to have a goal on how I am going to live my life 30 years from now, if God’s permits.
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Fitz,
I want to start FOREX trading, is there any book to learn? Is COL has Forex trading?
I am guilty of both. My ROTH and regular IRA as well as my taxable accounts are with a US brokerage firm. With the appropriate approval level, you are able to harness the power of option trading. Mostly, we sell options (both PUTs and CALLs) for income. If a short term oppertunity pops up and there is sufficient cash piled up, I will take it. For example, a huge pop in crude oil that is way overdone. I will either purchase put options or purchase an inverse crude oil ETF to capture the impending down move. These trades can last a few days to a few weeks.
When I am able purchase a stock such a T (AT&T) at a long term low, I am in man. AT&T was the former BELL system in the US and would be similar to investing in PLDT stock here in the Philippines, an old telcom. T was hit hard the past few years but started a nice recovery, plus the company still manages to increase the dividend every year. The current divy is .52 cents/share USD so each 1000 shares we own pays a quarterly dividend of $520.00 USD or approx P26,486.00 at the current exchange rates. Not bad to get a divy like that 4 times per year. I can and do hold a stock such as T for a very long time, perhaps for years. BUT, the trader in me also sells covered calls against the stock. One other benifit of owning solid dividend stocks, you can set up a DRIP (Dividend Reinvestment Plan) that will take each dividend payed and automatically purchase additional share of the stock. That was a super way to buy additional shares as there was never any commission. Not as big a deal these day with almost all brokerage firms going ) (zero) commission but it sure used to be. I have almost three hundred (300) “free” shares of T stock that have been purchased for my account this way.
By selling covered calls on my long term holdings, I am able to own quality stocks for the long haul. We capture capital gains if we purchase at prices well below fair value when the stock or it’s sector are out of favour. We collect regular dividends and depending on which underlying, we may even get a regular monthly dividend. Finally, the trader in me is happily selling call options and watching the time value of the option erode of the to ZERO after each sale. After expiration or even on the Friday of expiration, we “rinse and repeat.” The short calls also provide some downside protection allowing you to confidently stay with a trade that is down but still technically and fundamentally sound. So there you have it, I do BOTH investing for the long haul and trading of option short term for income generation.
Answering the test questions:
1. I choose b Because we have patience to wait. With several income streams, there is no need to rush anything. Some investments simply take longer to mature that others.
2. Again I choose b but I did so conditionally. If I am very familiar with the product, if it has been of benefit to me over a period of time, then YES for b. If on the other hand I have no idea if the product will be a great benefit, I would then do a short term trial run to see what all the fuss is about, If we like it, then heck yes, convert to a long term plan, spend the P15,000 for lifetime access.
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