Several of the questions most frequently asked of us have to do with trading. How do you define a trader? Should you trade? Why bother trading? Is it better to invest or trade? Those of you who are veterans of the market battle know if you are more inclined to trade or invest. But newcomers often are perplexed about which road to take. Surprisingly, even some seasoned market players are confused in their approach. They may consider themselves investors but actually have a trader’s psyche and therefore do poorly.
We don’t believe there is one absolute truth about whether it is better to trade or invest. We know many very successful traders, and there are certainly scores of winning investors. What we do know is that it is easier for most market players to win big by following the investing path to profits. It involves less time commitment, less skill, and is certainly easier on your emotions. So why should anyone even consider trading? Simple. Traders need the challenge and action! Whereas most investors are more conservative by nature and like to keep their lives relaxed and calm, traders are more inclined to live on the edge. They enjoy the thrill of battle and the competitive tensions that come with making decisions on the firing line.
2017 has been a very difficult year for traders. It hardly had a few dips that were fast and shallow. We suspect that 2018 would not be that different from 2017. Passive investing via ETFs is the major reason why the market has distorted the seasonal tendencies this year. The non-discriminating infusion of capital have been concentrated in a few big name stocks, which made the indices look very strong, making new record highs. But underneath the surface, we’re starting to get more new lows than new highs; 30 percent of the stocks in the S&P 500 are down for the year. It is almost like a two-tiered market, one tier being the FANG group of stock, the other tier being the rest of stocks in the indices.
The passive investing via ETFs has worked out for the investors and it will continue to work until it doesn’t. It has to be a big systemic shock to cause the market to crash. Only a severe crash will cause investors to pull money out of the market. That’s why all the dips are being bought this year. The non-stopping inflow funds into the indices created a low volatility and very trending market. With this type of one-directional environment, we need to really adjust and adapt the new market condition. Even if you are a die hard trader, it pays to tie your hands and let the trades run.
We are going to do more index funds trading and less individual stocks trading in 2018.
We will not produce a weekly blog next week during the Thanksgiving holiday.
Happy Thanksgiving to ALL.