Long-term investing versus short-term trading
- Contrast investing and trading
- Understand costs and taxes that favour patience
- Recognise how the odds change with holding period
Two different games
Long-term investing means buying assets you expect to grow over years and tolerating the swings in between. Short-term trading tries to profit from price moves over days or weeks.
Trading competes against professionals with faster data and lower costs. Most studies of individual day traders find that the large majority lose money after costs.
Costs and taxes add up
Every trade can carry a spread, commissions and slippage. In many countries, profits on assets held less than a year are taxed at higher rates than long-term gains. Frequent trading pays these costs over and over.
Patience also lets compounding work without interruption.
Time changes the odds
On any single day, the US stock market has historically risen only a little more often than it has fallen, close to a coin flip. Over rolling 10-year periods, broad US stocks have finished higher most of the time, though not always.
That history does not guarantee the future, but it explains why time horizon matters so much.
Know which one you are doing
Problems start when people mix the two: buying for the long term, then panic-selling on a bad week, or turning a losing short-term trade into a ‘long-term investment’ to avoid admitting a mistake. Decide your horizon before you buy.
A trader makes 200 round trips a year, losing an average of 0.15% per trade to spreads and slippage. That is about 30% of the money traded lost to friction each year, before any taxes, if each trade uses the whole account.
An index investor who buys once and holds pays a few hundredths of a percent a year in fund fees.
Key terms
- Long-term investing
- Holding investments for years to benefit from growth and compounding.
- Short-term trading
- Buying and selling over short periods to profit from price moves.
- Round trip
- A buy followed by a sell of the same position.
- Capital gains tax
- Tax on the profit from selling an asset for more than you paid.
Write down your own time horizon for the money you plan to invest, and which of the two approaches it fits.
Key takeaways
- Investing and trading are different games with different odds.
- Costs and taxes punish frequent activity.
- Longer horizons have historically improved the odds, without guarantees.
- Decide your horizon before you buy.