It’s probably true that people who tend to talk about their investments are more likely to be regularly trading shares – and perhaps bonds, options, cryptocurrencies, foreign exchange or gold.
But that doesn’t make them any more ‘real’ than people whose only investment is KiwiSaver or some bank deposits.
And what many people don’t realise is that those who frequently buy and sell their investments usually do worse than those who simply ‘buy and hold’, or steadily drip-feed into their investments over the years.
Research shows this time and again. Basically, it’s because most investors are not good at picking:
which shares or bonds will do particularly well.
when is the best time to buy or sell them.
By the time the ordinary investor has bought shares in a company with good prospects, the share price has already risen to reflect that outlook. And by the time our ordinary investor has bought because the market is rising, or has sold because the market is falling, it’s too late.
Once you add the costs of trading, such as brokerage and perhaps tax, frequent traders often do worse than other investors.
Buying and selling for entertainment
Some people will say they enjoy trading frequently and trying to ‘beat the market’. That’s fine, as long as you realise that your entertainment will probably mean your savings don’t grow as much as if you bought and held.
Are you confident that you – trading in a market with experts who do it all day, every day – are going to be on the winning side of the trades more than half the time?
Sure, if you’ve been trading shares for a while, you’ve probably made more gains than losses. But that doesn’t mean you’ve done better because of your trading. Over the long run most investments in shares grow.
Investing to maximise your savings
The investor who wants to maximise their savings buys a wide range of shares or bonds – either individually or via a managed fund – and sticks with their investment through market ups and downs.
This content is reproduced from ‘Hits and Myths: an introductory guide to investing by Mary Holm’.