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Sunday, November 8, 2020

Why I Don't Day Trade or Try to Time the Market

There are many ways how you can make money in the stock market. One method is to day trade. Day trading and investing for the long term are both viable forms of securities trading, and many traders opt to do both. Day trading involves making trades that last for seconds or minutes, taking advantage of the short-term fluctuation in a stock's price. With day trading, all positions are opened and closed within the same day.

Many of my friends have asked me why I do not day trade. You can make money by day trading; however, this method of making money in the stock market is something I dislike and do not pursue in doing. I used to try learning how to day trade. When I was still a beginner in investing in the stock market, I tried doing some day trading when I was still studying in the United States. It might seem easy and fun; however, it is actually pretty tricky and stressful.


This is why I decided to do value investing as a method to make money in the stock market. I believe that investing in the stock market for the long term suits me more than day trade. I want to explain why I decide to not day trade or time the market and choose long term value investing. I believe investing in the stock market for the long term is more beneficial and also more profitable.


It Occupied Your Daily Task.

One reason I decide not to day trade is that it takes a lot of my time every day. As a day trader, I have to be in front of the computer monitoring the stock price every day. It is basically like a full-time job when you are day trading.


I believe the time consumption as a day trader is more beneficial if I spend the time doing something more productive. For example, rather than always checking the stock price movement, I could be using the time to make a business of my own that can generate a healthy profit. Spending your time in front of the computer trying to time the market is a waste of time. Yes, you might be able to make few bucks here and there. However, in the long run, you probably make losses too.


By being consistent, day trading every day does not guarantee you will profit from your trade. By becoming a long term investor, I can actually make a better profit from my capital. Also, I found that using my time to create a successful business can let me invest more of my money into my portfolio. I believe by being consistent contributing money into my portfolio account every month and using the money to invest in the stock market using value investing is more practical and can perform better for your investment than trying to time the market.

Trading is Stressful.

Watching the hourly market movements or always having Bloomberg blaring in the background can be a massive emotional roller coaster. I tried becoming a day trader when I was still in college in the United States. It is not simple, and it's also very stressful. I was able to make some profit here and there; however, I also lose a lot. I spend many hours monitoring the stocks every day, and it was not practical.


It was very emotional since I was able to make a lot of money and also lose a lot of money. The stock movement drove my mood, and it was not fun. Moreover, throughout my trading venture, I lost more than I profit. This is why I decided that day trading or market timing is not the style of investing I want to pursue.

I like the way I invest now because it is straightforward and practical. It is also very profitable and does not consume a lot of my time. With my investing strategy, I do not have to worry about where the stock market is going. I know that I have great companies in my stock portfolio, and holding them for the long term will help me become very wealthy.

Most Traders Lose Money.

Most traders will lose regardless of what methods they employ. Even if all traders knew how to trade successfully based on current conditions, most traders would still lose over the long run. The academic evidence shows that most traders actually lose money. 80% of traders actually lose money before fees and taxes. It's no surprise more than 75% of all day traders end up quitting within just two years. In 1999 The North American Securities Administration Association (NASAA) reported 70% of traders would lose nearly all their money.


It might be true that there are some traders out there who actually made it. This is really a very few percent, and it is not consistent. If you see them becoming really wealthy is not due to stock trading, but the business they own. For example, a famous penny-stock day trader, Timothy Sykes, has made a great fortune from stock investing. However, this is not the prime reason how he became wealthy. If you actually take a look carefully about how he gets wealthy is due to the business he owns. His online course on penny stock trading is how he became wealthy.


He is not able to live the lifestyle right now by just being a good trader. It is impossible! No one has consistently made a profit through day trading. Timothy Sykes is excellent in marketing his online course to penny stock trading. He used a lavish sports car, extravagant vacations, and life style to attract new students to his course. He wants to give the impression to the public that by becoming a day trader, you can live the lifestyle as he does. It's all just marketing! Do not be fooled by this.


When I was still an amateur stock investor, I was also attracted to the internet's day trading seminar. I was lucky that I did not sign up for them and decide to read high-quality investment books written by successful investors. It was because of these books I read that opened my mind to understanding how the stock market works. If you are still a beginner, I advise you to read investment books. Keep learning so that you have a better knowledge of making a stock investing decision.

Timing the Market is Impossible and a Waste of Time.

The market's historical perspective shows us a pattern of bull and bear markets that may be tempting for investors. You guys probably ask why not try timing the market, and avoid those short-lived bear markets? Wouldn't that be more lucrative? Unfortunately, it's not as easy as you guys think.


I learned from reading an investment book written by Peter Lynch that it's impossible to time the market. If you don't know who Peter Lynch is, he was a former fund manager from Magellan fund at Fidelity, who is one of the most successful investors in history. The fund he was managing had a magnificent track record of an annualized return of 29.2%. It was more than twice what the S&P 500 earned during that time.


Peter Lynch mentioned that more money had been lost by investors preparing for correction or anticipating corrections than lost in market corrections themselves. He believes that trying to time the market is impossible, and it does not work. There is no way for anyone to know where the short term future movement of where the stock market is going. No one knows when the next Bear Market is going to be.

He went on to give an example of why market timing is impossible. He used a period of market performance from 1965 through 1995. Let us say there are three investors, each of whom puts $1,000 into stocks annually over these three decades.


Investor 1, who is very unlucky, somehow manages to buy stocks on the most expensive day of each year. Investor 2, who is very lucky, buys stock on the cheapest day of each year. Investor 3 has a system: She always buys her stocks on January 1, no matter what.


You guys probably think that Investor 2, having a great skill for timing the market, would end up wealthier than Investor 1, the unluckiest person on Wall Street, and would also outperform Investor 3. Nevertheless, over 30 years, the returns are surprisingly similar. Investor 1 makes 10.6% annually; Investor 2, 11.7%; and Investor 3, 11%. Even with perfect market timing each year after year, it is only worth only 1.1% more than horrible timing year after year.


Trying to time the market is generally a waste of time and effort. It is not when you buy that matter, but how long you own the securities. After experiencing stock trading and market timing myself, I realized it was impossible. There's no way I was able to know where the market is heading in a short-term period. This is the reason why I decided to invest in the stock market for the long term.

Buy-And-Hold Investing Beats Market Timing.

By investing in the stock market for the long term actually beats market timing. Peter Lynch mentioned, "If you put $100,000 in stocks on July 1, 1994, and stayed fully invested for five years, your $100,000 grew into $341,722. But if you were out of stocks for just thirty days over that stretch—the thirty days when stocks had their biggest gains—your $100,000 turned into a disappointing $153,792. By staying in the market, you more than doubled your reward."


Invest in the stock market for the long run rather than the short term. If you guys look at the S&P 500 performance from 1926 to now, it actually returns a 10% annualized average. This is the reason why I do not want to day trade or time the market anymore. Rather than trying to figure out the short term trend of the stock market, I decide to buy and hold stocks long term. I believe that building a dividend growth portfolio and contributing $2,000 every month is more practical. 

No timing the market? So What to do Instead?

So if stock trading or timing the market is impossible, what should we do instead? My recommendation is to do what I am doing. I build a portfolio of dividend-paying stocks and contributing an extra $2,000 per month to it. I buy stocks on a steady basis. Like dollar-cost averaging, however, instead of purchasing the same stock every month, I buy a stock when it's in the value territory.


I applied value investing when buying a stock. I focused on investing in a company because of its fundamentals. Instead of wasting my time trying to figure out where the stock market is heading in the short term, I focused on creating a business that can generate profit. I believe that having a successful business of my own is more beneficial because I can use the money that I generate into my portfolio. I treat my dividend growth portfolio as a passive asset that I can use to grow and build my wealth through compounding yearly over a long period. 


I do not care or try to monitor my stocks every day. I know by holding them for a long term period, I can generate significant returns. I am not wasting my time and effort figuring when to buy or sell. I just keep buying a great dividend-paying stock that has great value and fundamentals. Moreover, since my portfolio is a passive asset, I can focus on figuring out how to generate more income. I want to increase my primary income to contribute and invest more in my portfolio account.

Time to End This Post.

I hope this article I have written explaining the reasons why I do not do day trading or market timing. I have many of my friends who asked me why I don't day trade. They think that my investing method is very slow and boring. My investing style is indeed very plain and boring; however, I am very confident that my portfolio will do great over a long time. I am not trying to make tons of money instantly but actually do it slowly step by step through compound interest each year. 


Instead of wasting my time trying to predict market movement, I used it wisely, trying to build a business of my own. I want to increase my primary income so that I can invest more money in my portfolio. I know that my investing strategy will result in me becoming wealthy decades ahead.

If you are a beginner to stock investing, please increase your knowledge by reading tons of investing books. I am not trying to imply that stock trading or timing the market is impossible. However, please make sure you do a lot of research so that you have a better understanding. I do not want you guys to lose your hard-earned money in the stock market.

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