One question I’m sure many of us have asked ourselves before at the start of our investment journey is whether we should go long term or short.

There are certainly many arguments for and against on both side of the fences.

To say either one of them is the best solution is definitely being biased. This is because every individual is a unique. The decision to go either way really depends on his investment personality and risk profile.

In fact, even in trading itself, there are people who differentiate between long and short term trading.

While we won’t venture in depth to that, let’s do a heads on analysis between long term investing and short term trading shall we?

Pay attention now….you are about to discover where you stand…

Long Term Investing vs Short Term Trading

Long Term Investing

Pros

• With a longer term horizon, you will be able to reap the magic of compounding effect. The snowballing effect can turn your puny portfolio into a MONSTER!
• When you think long term, you will do fewer trades. Fewer trades = less commission paid.
• You can take advantage of dividends payout.
• Generally, volatility and risk diminish over time. The longer you hold on to your investment, the higher the probability of you earning a profit.
• You need not monitor the price all the time. That’s a big plus. Monitoring is tiring. You can just let it run on autopilot and look in from time to time.

Cons

• Lots of patience required. Sometimes, it may take years to earn a significant gain.
• Test of your emotions. You have to endure the high and lows of price movements which are bound to happen during a long time frame.
• You wouldn’t be able to see immediate profits.

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Dear readers,

How’s everything? This is a note from your ever dependable Mr Stock.

Well I know, I know pal…

Market ain’t doing too well. Bloodbath everywhere. You are probably blaming me for the 57% reduction in your portfolio value.

Wait! You can’t do that to me. Don’t forget I’m single-handedly responsible for your 258% charge up in your portfolio value during the bull run last year? You were very happy with me then. Quick to forget already?

Anyway, if there is someone you have to point you finger to, point it at my old friend, Mr Interest.

Mr Interest - He Is A Sneaky Cheat. Let Me Explain…

He has always wanted to see me down. It’s like his personal life mission. To watch me fall is his greatest pleasure. Cos that’s when he is rising.

You know what? I’m don’t take that lying down. When I go up, no more party time for him - he goes down!

If you realize by now, our fortunes are always the opposite of each other. We have an inverse relationship. Weird but true.

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Nope. I’m not talking about your bedroom adventures, silly.

Neither am I talking about your exercising routine.

We are gonna discuss a more serious topic - your investment approach.

Go The Active Or Passive Way…?

In investing, there are two kinds of approach to stocks investment - the active and passive route.

Active investors are those that take a keen management role for their portfolio. They assume responsibility over their portfolio’s performance.

They frequently pore over financial statements, monitor the stock market news and peer at the stock prices every now and then.

For investors that may not have the time or knowledge, they pass the management over to their broker or fund manager. In any case, the money is still managed actively.

All these are done with one aim in mind - to beat the stock market index. Think Straits Times Index and the S&P 5000.

Passive investors, on the other hand, do not worry about beating the market index. After all, 90% of fund managers and retail investors fail to outperform the index.

So, if you can’t beat it, why not join it? That is the attitude of passive investor - to get returns that mirrors the stock market index’s performance.

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Investors profit from stock investing because they sell at a price that is higher than the purchase price.

The price difference determines the gain. Or loss.

Now, let’s stand back and think for a moment…

Have You Ever Wonder Why Stock Prices Fluctuate?

The stock market is a dynamic place. The price is a direct result of the market forces.

From an economical point of view, people usually treat it as a case of supply and demand.

When there are more people buying than people are selling (higher demand than supply) - the price goes up. The converse is true - price goes down when more people are selling than buying.

Straight Forward Isn’t It?

Not quite.

On further analysis, can we truly treat stock price movement as a result in shift of supply and demand? No.

Here is why…

Supply doesn’t change at all (assuming no stock split, issue of bonus shares, buy back etc).

Therefore we cannot say the supply has risen or dropped, simply because it doesn’t. The amount of stock shares in the market remains constant.

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