Trading too much generally hurts returns. Studies show that investors who trade more often make a lot less money on average. The more active traders, who are also likely to be the more overconfident traders, trade too much and end up with lower performance after paying their trading costs. In contrary, the buy-and-hold investors, after trading costs, were outperforming the most active investors by about 6-7% per year. Buy-and-hold seems to be the only way that most retail investors will make money in stocks over the long-term.
As Charlie Munger, co-founder of Berkshire Hathaway says, “The big money is not in the buying and the selling, but in the waiting.” The power of compounding is another powerful tool to success. Additional, another huge benefit is to take advantage of long-term capital gains, which are taxed at a much lower rate.
If you are a new to the investment business resist the temptation of day trading and avoid the following:
1. Do not put all your money into short term trading/day trading. If you are a newcomer, try paper trading first or just use 5-10% of your overall assets for short-term trading. The rest, simply invest in quality stocks or unleveraged index ETFs for the long-term.
2. Avoid options and leveraged ETFs, unless you have the experience to use short put option strategies. For every story you hear about huge option gains, there are at least 3-4 huge losses you didn’t hear about.