5 reasons to rethink short-term trading
Whether you’re investing for the long term or trying to make a quick trade, here’s what you should consider
Read, 3 minutes
When you’re new to the market, buying into the latest meme stock or coin can seem like a good way to get started, but trading—trying to capitalize on short-term changes in a stock price—can carry a great deal of risk, and you could lose out on some of the growth opportunities that come with a long-term investing approach. Here are five reasons to pursue your financial goals through long-term investing rather than short-term trading.
When a stock is rallying, you may be tempted to believe you could be nimble enough to dart in and out with a gain. But the real fear of missing out (FOMO) to consider is the prospect of missing out on the long-term returns of holding the shares of a great company in a prospering industry. Not only is it difficult to turn a profit by trying to time the market, but short-term gains, as satisfying as they may seem, might be small in comparison with what a long-term holding could be worth. Also, by the time you hear about a “hot” stock, you may have missed out on easy gains—and risk buying high.
The one-and-done conundrum
Let’s say you turn a profit on a quick trade. What’s your next move? Can you consistently pick winners? Short-term trading requires a sophisticated understanding of the markets and real-time monitoring of any information that could impact stock prices so that you can make informed decisions. If you’re relying on social media for information, it can be hard to verify that the person providing tips is really the expert they claim to be. Always check with your professional advisor.
Prioritizing peace of mind
Long-term investing may allow you to sleep better at night. When you buy and hold an asset, you not only have time to recover from any downturns but are also less likely to make an emotional decision that’s based on daily swings in the market. Short-term trading, on the other hand, requires day-to-day—and sometimes hourly—management and monitoring of your holdings and news cycles. Each person needs to weigh their risk tolerance.
Taxes, taxes, taxes
Paying a capital gains tax is a relatively good problem to have—congratulations, you made a profit. However, capital gains tax rates are significantly higher on profits for assets held one year or less than they are on those held for more than one year. If you have capital gains on assets you sold less than a year after buying them, you will be taxed as ordinary income (similar to wages or salary)—taxed up to 37 percent, depending on your tax bracket. Conversely, the tax rate on long-term investment gains could be 0 percent, 15 percent or 20 percent—depending on your income level at the time you decide to sell, which means you keep more of what you made. The 3.8% net investment income tax may also apply.
The longer your time horizon, the more you can benefit from the disbursement of corporate profits via cash dividends, stock dividends, stock splits and share repurchases during the life of a long-term investment. The distribution of corporate profits via these methods could potentially boost share prices over the long term, and when they’re re-invested in your initial investment, they can help build wealth over time. Keep in mind that not all stocks pay dividends and that if a particular company offers dividends, the dividends are not generally guaranteed to be paid.
Remember, building wealth takes time, a clear investment strategy and a mix of assets that factor in when you’ll need the money and how much risk you’re willing to take. Of course, factors such as supply-chain shocks, interest rates and economic reports can impact your holdings, so make sure you review your asset allocation regularly and rebalance as needed.
What about my short-term goals?
If you’re looking to save for short-term goals, such as paying for a wedding or home improvement, there are many great options, including savings accounts and certificates of deposit (CDs).
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Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.