Retail Investors With Trading Aspirations
I’m posting the response I gave to a close family member upon hearing that he took profits on positions established last Friday with my advice. My objective per his request was to build a long-term portfolio of financial stocks with the potential to start paying dividends several years hence…
His reasoning for taking profits? “I was concerned about a big sell-off tomorrow” (emphasis mine)
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[Regardless of the fact that you made 35% in under a week], what you did was create a tax hit. What information did you use that you feel justified an assumption of that magnitude?
That’s like me having a pacemaker installed because I think I might have a heart attack tomorrow. Did I have a hunch or did I actually perform a deep medical examination to come to some sort of a logical conclusion from empirical evidence? What data did you look at? Because as you will see over the next several weeks the rally just started and there are about 2000 points left in upside in the Dow before this is over.
It’s your money, you have to do as you wish. I’m only going to tell you this one more time, and I’ll never mention it again.
If you approach this with short-term ideas, like fearing a “big sell off tomorrow”, you are not going to have any money left by the end of the year, if not by the end of March, or even sooner. What would have happened if the sell-off from earlier in the week would have continued? Would you have cut your losses to “ensure your positions?” Or would you have become a “long term investor”? Think about that. You are watching your portfolio day by day, and you are also worried about being left behind.
Retail investors tend to take profits too early, and have no problem buying something back at a higher price because they have little conviction… they know there is very little data backing their ideas up. This will lead to false hopes that you can generate income from trading. You will lose sight of the fact that the market is mostly random in nature and therefore for you to be successful, you have to apply a strategy that is working in the present environment. If you feel like it’s anything but random, then you will pay too much attention to your “feelings” and “gut instincts”, and that will lead you into the trap that every retail investor turned trader falls into, which is that the market will always take your money from you because when you fall on the wrong side of your feelings, that’s when the brain short circuits and you get lost in the headlights.
I tell you this from experience and because I don’t want you to become short-term in focus. Your tax situation will kill you, your transaction costs will kill you, and you will never benefit from the power of long-term compounding. You will not earn a dividend either. Are you interested in making a few hundred dollars, or even a few thousand dollars or are you interested in building a massive portfolio over the long run?
If you want to trade a portion of your money, that’s fine. Set aside a [small percentage] and make short term opportunistic trades using levered ETF’s. But don’t expect to do those trades every day, or even every week. Park the rest in smart investments and allow the long-term benefits to kick in for yourself.
