4 Reasons You Shouldn’t Trade Stocks
You don’t have to be involved in the world of stock trading to hear news about the market. Most of you likely scroll past it on social media every day and don’t pay any attention to it. If you consume any form of media whether it is through TV, internet, or radio you have heard something about it.
Trading individual stocks can be extremely exciting and profitable but it’s not all it’s cracked up to be. It has never been easier to open an account and trade today. You can download an app on your phone and have money in the market in less than 15 minutes. This ability to access the market has flooded it with people who are determined to make millions. Unfortunately for most of them they will go broke.
I have been trading since I was 16 years old. Some weeks I will make awesome money and others I will lose even more. Trading has taught me a lot of lessons the hard way that I know will pay off down the road. Saying that I realize it’s definitely not for everyone and I wouldn’t recommend it for most. For those of you thinking about getting into it read these four reasons why I wouldn’t suggest it first. I didn’t write these to discourage you, rather show you the truth behind it all. Understanding these will save you a TON of money and make you healthier mentally.
1. It’s an Emotional Rollercoaster
Psychology in trading will make or break you and speaking from first-hand experience trading is hard, extremely hard. Until you lose 10% of your portfolio in a week you’ll never truly understand how this feels. The school of hard knocks is in full effect when it comes to trading. Unlike a normal job where you can forget about everything when the clock strikes 5 with trading, it can bleed over into every part of your life.
Trading is a form of lower-risk gambling. You are betting your money on a company’s stock price and it is either going to go up or down. A great example of this is Bitcoin. For those who don’t know Bitcoin was one of the first and most popular cryptocurrencies. In late 2017 the price started to skyrocket. Thousands of people started to buy as much as possible because they saw people making millions.
The problem is what goes up will come down and usually at the same pace. In less than 2 months the price increased over 300%. This is more than some people will make in 10 years of investing! More and more people bought until the bubble finally popped. Unfortunately, most people bought right before the bubble popped because greed took over. They then held on because “it will surely go back up”. The price dropped from over $19,000 per coin to just over $6,000 today. This cost some people their whole lives savings.
There are ways to minimize this stress though and that is through risk management. Setting rules that align with your risk profile are key to not only lower stress but raise returns. Following these rules is a completely different issue but that’s where self-discipline comes in. Here are some examples of what I like to follow.
- Never trade on my phone.
- Set a price that will automatically buy for me, usually around a breakout.
- Never hold a stock through earnings.
- Never risk more than 3% of your portfolio on a single position.
- Never buy a stock on the first day I look at it, 2 days minimum.
- Take winnings where I can, don’t get greedy.
Most of these rules revolve around one thing and that is FOMO (fear of missing out). There is a great community of traders on social media, especially Twitter. It can be hard to see someone making a ton of money one day in a stock that you have no position in. The last thing you want to do is chase it because chances are you will lose. I have done this a half dozen times and every time I get burned. If you decided you want to start trading it will happen to you as well. It’s all apart of training your brain.
Moreover, you will catch yourself checking the stock’s price every five minutes. It truly is an emotional rollercoaster. This is obviously extremely unhealthy and will lead to you making rash decisions like selling at the first sign of the price dropping. I’ve been trading since I was 16 and I still catch myself doing this. Understanding to stick to your rules and mitigating risk will allow you to play the game and have a little more control.
Remember this is about freeing up your life and having your money make money. It isn’t supposed to be a huge stress, which for most people it is.
2. No Control
Speaking of control, the markets going to do what the market is going to do and there is nothing you can do about it. Unless you have a crystal ball or some insider information you have no control. If you didn’t know insider trading is a felony and can land you in jail for a long time so I’d highly advise against it. This lack of control is why I recommend against people actively trading.
Unlike other investments, like a rental property, for instance, you have no control of the stock’s price. If you own a rental property you can control who your tenants are, what they are allowed to do, and what they pay. There are still risks here but you have more control.
This ties back into training your brain to let the stock price do what it’s going to do.
3. It’s not Sexy
When you see people talk about trading stocks they usually have a backdrop of a Lamborghini or a stack of cash in their hands. This is just not the case. In fact, it may be one of the most boring, lonely jobs there is. If you are a day trader you will spend hours staring at a screen, looking at thousands of charts, and analyzing so many financial your head will hurt.
If you are a profitable trader for 20+ years then you do have the possibility of having fancy cars and stacks of cash but it takes time. Most traders don’t start out with a huge account. Rather it takes those 20+ years for compounding interest to give them a nest egg. Until then it is a grind.
Trading does allow you to work from anywhere with Wifi which is a huge perk. But if you are looking for a glamorous lifestyle starting tomorrow then you need to look somewhere else.
4. The Long-Term Wins
If you could just buy something when you’re young and hold it until you retire why wouldn’t you? The stock market historically will return 7-8% which will give you a substantial nest egg. Most actively traded retirement accounts won’t be able to beat 8% yet you’re putting in much more work. It makes no sense.
This doesn’t exclude accounts that are managed by a certified financial advisor/planner either. A Barclays Investor study found that only 29% of actively managed accounts beat the S&P 500 over a 15 year period. These accounts start out at a disadvantage already since you’re paying them a fee. The bottom line is you have a better chance of a good return by playing the long-term game and investing in an index fund. This is why in my book I preach that you most likely don’t need a financial advisor.
For the majority, the best route is to buy an index fund now and hold it for 40 years. Of course, the market will go up and down but it historically has averaged out to be an 8% return.
Wrapping it Up
Have I scared you away yet? That wasn’t the main goal of this article rather show you the truth behind trading stocks. Personally, I enjoy it, it’s a game for me and I have been profitable at it. This hasn’t always been the case and I hope you understand you will have to go through some rough times if you choose to go this route.
Many people do this for a living and there is nothing stopping you from doing it too.
Starting next month I’m going to start posting my actual trades as well as position size. Until then you can follow me on Twitter @Shelbygrosch where I post my trades currently.