I like to dabble in stocks and shares. I’m a real beginner, but I’m in this to make short-term cash; For example, I just sold some shares to pay for my vacation flights in February.
But my friends and family insist that I play the long game and hold on to investments for years instead of weeks. They say I’m being a real amateur for not realizing this. What do you think?
LM, by email
Money psychotherapist Vicky Reynal responds: There are three questions I ask people when they talk to me about their investments: Are you fully aware of the risk you are taking? Are you aware of the emotions that drive your decisions? And does it fit with your broader strategy and plan? If the answer to all three is yes, then you have a counterargument to addressing your family and friends’ concerns about your short-term trading.
But if any of them are a negative answer, then there are dangers to consider. Let’s look at them one by one.
It’s always worth considering whether beyond the obvious reasons we invest (to grow our wealth or make some money quickly), there are underlying feelings that we are trying to address through behavior.
People become addicted to trading because it gives them an emotion that makes them feel good, in contrast to an emotional dullness or sadness that they are afraid to face.
However, others might invest because it gives them a sense of control at a time in their lives when they are facing uncertainty.
If you’ve generally been conservative with money and have recently realized that you’re willing to take a lot of risk, this could also be a sign that something emotional might be going on. Have you thought about this or is there a part of you that is trying to sabotage your finances?
Is it better to sell stocks and shares in the short term, like paying for plane tickets, or invest for the future?
If you have excluded the emotional drivers and it is really about money, then you need to check that you fully understand the degree of risk you are taking.
What your family and friends might be warning you about is the fact that investing with a short-term horizon carries higher risks because stock prices are more volatile in the short term; Even experienced investors can lose money trading in the short term. term.
If you are clear about the risks, ask yourself if this amount of risk aligns with your risk tolerance. And here I’m not just talking about how much money you can afford to lose, but how much money you can tolerate losing.
People can differ greatly in how they respond to loss, and even the same person over the course of their life can be resilient to risk and loss at one stage of life and respond very differently at another.
It’s done well so far, but what happens if the next time you have vacation money through a trade, the value of your shares suddenly plummets?
How would you feel if just when you needed the money the value of your stocks were particularly low, making it a bad time to trade?
I have heard of people who resorted to borrowing money from family and friends because they were counting on paying the taxman by selling their shares and felt trapped when the value of the stock they had invested in was at its lowest point in January.
Try to imagine how that would feel.
Since you’re a beginner, there may be things in the fine print that you may not have considered, such as the fees you pay when you trade frequently.
It is essential to educate yourself on all the pros and cons of this strategy so that you do not feel blindsided in the future.
And finally, do you have an overall strategy for growing your wealth and how does this trade fit into it? Ideally, you should have a plan for your future finances with long-term investments aimed at growing your wealth along with short-term trades.
Your friends and family seem to be worried that you are only focusing on short-term victories and not planning for the future.
The ‘long-term play’ that your friends and family recommend is based on the fact that long-term investments in diversified stocks have historically given positive returns: they are not affected by the short-term volatility of the markets, but in addition From that, they benefit from the compound growth – essentially a snowball effect of returns – that you are missing out on if this is your only form of investing.
I think it’s tempting to let your recent victories be proof that you’re right, but you’ve told me you’re new to this.
When investing, it is essential to be humble, curious and understand risk.
Your friends and family are trying to warn you about the risks of a short-term strategy and the missed opportunities if you use it to replace a long-term one.
- Do you have any questions for Vicky? Email: vicky.reynal@dailymail.co.uk