What’s the Best Investing Style for Me?

by Adam on April 28, 2010

Monday’s post outlined reasons for not investing and why you should overcome them. Most people have a certain view on investing based on the they perceive ‘investors’ to be and how they act.

What’s your perception of stock market investing? Do you think of the shouting traders of the New York Stock exchange shouting “Buy Buy Sell Sell”?

Do you think it’s all about lots of charts and numbers flashing across a ticker tape screen? If you are thinking this then you’re likely thinking about “Day trading”.

The Day Trading ‘Gambler’

Day-traders spend their time buying and selling shares for profit (or at a loss if it doesn’t work out) –often in the same day, hence their name. They make money by taking calculated risks on the direction of the price of a certain stock, currency or commodity (commodities are real materials like iron, gold, and even foods like sugar and chocolate).

As prices tend to be volatile they can ‘buy low and sell high’ –if they do it right. But doing it right consistently is very hard, and very high risk: You can earn you thousands in minutes, but equally you can lose it all too.  Rather than ‘investing’ it’s really ‘speculating’ (educated guessing) and the practice must certainly make the term ‘investing’ seem taboo and in many ways day-trading can be compared with gambling at a casino.

The Committed Investor

Another perception of investing is that it involves lots of reading and calculations. You may think investors all read the Financial Times and spend their free-time looking at company balance sheets and annual reports.

And some do!

The philosophy of this type of investor could be called: “Buy and Homework” –the investor buys shares of companies that they have thoroughly researched and then keep up-to-date with how the company is doing, hoping to glean any information that might tell them when to sell and when to buy more shares.

The “Buy and Homework” approach can be a very profitable strategy. In fact the richest man in the world, Warren Buffett, does exactly this. In contrast to the day trader, Warren has famously said:

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

It may well be profitable when done right but the research involved takes a lot of time and it doesn’t always yield results. If you enjoy the process it can be a fun, intellectually stimulating and profitable hobby or career but from the outside it can seem dull and boring. And if you’re finding it a chore you’re unlikely to grow your pennies with this method.

Buy and Hold

‘Buy and Hold’ means exactly that. You buy investments and hold them over the long term. You don’t need to care about the daily ups and downs. Instead you hold onto your investments with the assumption that, as shares in profitable businesses, the value of them will go up over time. The strategy has been under attack in recent months but over the long term ‘buy and hold’ has allowed people to grow their pennies considerably with many studies demonstrating that it beats the performance of many committed investors (who can make mistakes or get greedy), whilst avoiding having to make frequent and costly trades, or reading company reports.

Boring and effective? It certainly is a strategy worth exploring.

Magical Penny is updated 3 times  a week: Monday, Wednesday and Friday.

Don’t miss a post: Sign up with the free newsletter and free ‘posts to email’ feature by clicking here or simply grab the RSS feed.

{ 5 comments… read them below or add one }

Rightly Knightly

And what is your investing behaviour?

Jon

As I’ve said before, buy and hold has more risk with ever greater sums of money, as it can be much more vulnerable if you need your money back in the middle of a downturn. Anyway, that aside, a good clear post, but you are indeed teasing us somewhat.

Sean

All very well and good.

But I think you’re missing a key question here.

WWMD?

“Some boys try and some boys lie but
I don’t let them play
Only boys who save their pennies
Make my rainy day…”

Couldn’t resist ;-p

The Other Adam

Adam you dirty finance tease, give us more info on the stocks and shares ISA. You’re dangling it in front of us like a big £ shaped carrot!

Good post though!

Adam

@Rightly Knightly -Buy and Hold -and its arguably the best strategy for young investors
@Jon -Downturns don’t matter when you’re young when it comes to portfolio returns -only when older. That’s why its great to learn to be proactive now so you are more likely to adjust for risk. The problem comes with ‘black box pensions that people don’t understand and therefore do not touch until they need it, in which case the risk profile of the portfolio could be way off.

@Sean -Love it, seriously! (non Gleeks -Sean is thinking “What would Madonna Do?” -a reference to the TV show glee. Yes we are cool and we know it.

@The Other Ad -perhaps I am but i want to make sure you know I present the full story in easy to follow blog posts, rather than saying “do this, do that”. Thanks for the support -your request will be answered soon enough.

{ 2 trackbacks }

Previous post:

Next post: