Investing vs. Trading
Posted On April 12, 2020
Investing and trading are NOT the same things. All too often people get started in the stock market and watch their money gain 20% in a matter of a few days. Then as they continue to buy and sell stocks they lose all of their money and exclaim “Investing is just gambling, you’re sure to lose money!” Well hold on their champ, were you investing at any point?
Allow me to give you a brief description of what investing actually is. Investing is providing a loan of your money to a company or multiple companies so that they can use that money in whatever way they see fit to make their business grow.
Now let’s go back to trading. Trading is essentially just short term money-making. When you buy a stock in a company hoping to trade that stock short term, you are just trading stocks. The technical term is “speculative trading”
Trading is the fastest way to get broke in the stock market, which is fine. If you are comfortable with gambling part of your portfolio in this way, more power to you. Just understand that if, or more likely, when you end up losing money, don’t blame investing.
Investing is providing capital so that a business (or businesses) can purchase things to make their business, and therefore your money, worth more. When you invest in a company, that company has to do better than when you started investing in order for you to make money. If the company does worse, you lose money, simple.
Index funds and ETFs
I don’t invest in individual companies, I invest in the U.S. economy. How you ask? Total stock market index funds, and ETFs. These work in very similar ways. When you have money in an index fund, or hold an ETF, you are holding a partial share of all of the companies contained in it. So you can get an oil ETF that contains a bunch of shares of different oil companies so that it does the diversification for you.
Index fund and ETF investing are what 95% of my portfolio is. The reason for that is I have no idea what a company will do. I don’t know if Apple will drop over the next 5 years, or if Google will collapse under government regulations. I have no idea, Frankly, no one does. Study after study shows that more than 80% of actively traded funds perform worse than the S&P500, and they charge you for it.
Here’s an example, FFFHX, Fidelity Freedom 2050 target-date fund, returned 6.36% annualized over 10 years. They also charge .75% per year to do it. VTSAX, which is just 1 example of a total stock market index fund, returned 10.15% annualized in the same 10 year period and charges 0.04%.
Don’t have VTSAX as an option? No problem.
The retirement plan that the company that I work for doesn’t have a total stock market index fund. They do, however, have a small and a large-cap index fund, so I just do both of those. Simple and more effective.
Whether the market is higher or lower right now makes no difference. By investing in VTI (ETF offered by Vanguard) or VTSAX (Index fund offered by Vanguard) or other broad-based index funds and ETFs, you are betting the U.S. economy will improve at some point, which it has almost every single year since the stock market was created.
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