How to Ruin Your Retirement Plans by Day Trading
I've read a disturbing number of articles lately about investors who've decided to abandon the buy and hold approach to stocks and now are convinced they can trade their way to profits. If you're thinking of heading down this path, let me just say, you've been warned.
If you become a trader instead of an investor, odds are good that you'll wake up dazed and bankrupt one day. While you may have some initial success in these volatile markets, you're likely to get creamed at some point. And that won't be good for your retirement plans.
Let me tell you a story that should sound familiar. In the late 1990s the term "day trader" emerged to describe all of the brilliant investors who were trading their way to riches on their lunch hours. Do you know any day traders who are rich today? I doubt it.
Most of these people were wiped out when the tech bubble collapsed. See, it's easy to trade when the markets are generally moving in one direction. But when the worm turns, traders usually can't recognize the paradigm shift. As their losing trades pile up, they enter into a downward spiral of transactions that eventually destroy their portfolios.
I expect today's newly minted day traders will eventually suffer the same fate. Don't kid yourself into thinking you are good at something (day trading) that to my knowledge has never been demonstrated to work over the long term.
I know the last two years have been difficult, to say the least. But that doesn't change the fundamentals of long term investing. We have had declines as big and bigger than our recent crisis, and the economy has gone on to better days. And I expect it will again.
Investing works because as the economy grows, corporate profits generally grow. If you're an owner of public companies, you generally share in that wealth creation through appreciating prices and stock dividends. That's what we know about the markets, and 100 years of data bears this out.
If the economy doesn't grow and there are no profits, then we are dealing with a zero sum game. The pie never grows and then it's a fight over who gets what part of the pie. This seems to be the worldview of the new retirement plan day traders. They're convinced the market won't grow, so they have to trade their way to a bigger piece of the pie.
If you're convinced the markets won't grow, then I suggest a better strategy is for you to just get out. Because if it becomes a traders game, you'll likely lose to professionals who are much better at trading than you are. But the pros are happy to have you join the game. Somebody has to be on the losing end of their profitable trades.
Bottom line: Do yourself and your family a favor. Stick with the fundamentals of balance and diversification. I expect those who do will have a lot more money in 20 years than those who don't.
Stock broker photo courtesy of artemuestra C.C. 2.0
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