Why You Should Quit Trading Stocks – Is It Worth The Risk?
If you have paid any attention to the news this week, you’ll know Tesla’s stock price has been surging. Some see this as a great opportunity to make some quick cash. Me? I see this as another opportunity to warn people against trading individual stocks and other securities.
Don’t get me wrong, I’m a huge fan of Elon Musk, Tesla, SpaceX and basically everything else Musk touches. The guy is smart and a great salesman but is the stock really worth almost $1,000 a share? To be honest, I don’t know and neither do you.
Why should you quit trading stocks?
The risk involved with buying and selling individual stocks usually isn’t worth it. It takes time, patience, knowledge, and experience to be a great stock trader. Most people think trading stocks is a really great way to strike it rich. In reality, most people lose money and give up capital that could have been better invested in a low-cost index fund.
We don’t have a crystal ball for the future. We’re not palm readers or guru’s so predicting the future of what a stock’s price will do is out of the question. So why do people try to assume they know what will happen to a stock’s price?
Personally, I believe it’s a combination of FOMO, greed, and ignorance. It’s a game that the majority of people are never going to win.
Why Stock Trading Is So Risky
I’ve written many articles on why stock trading is so incredibly risky so I won’t bore you with all the details. If you want to learn more then check out these resources:
- 4 Reasons You Shouldn’t Trade Stocks
- Why I Stopped Swing Trading – Stock Trading Made Simple
- How To Start Investing Today – An Investing Guide For Beginners
Here’s the gist; stock trading isn’t the sexy profession that some people online make it seem. In reality, stock trading is an emotional rollercoaster that will test your self-discipline every single day. It’s a 9 to 5 job and when the market is open, you need to be present. Especially if you want this to be your full-time income.
Couple all of those things with the fact that you have absolutely zero control of the market and you have a recipe to lose a TON of money.
You Can’t Control The Stock Market
I want to emphasize the fact that you can not control the stock market. I also want to show you some charts to give you some perspective on why I never suggest people trade individual stocks. First up, the Tesla ($TSLA) chart over the last six months.
What. A. Beauty.
Seriously, I am jealous of people that have been long Tesla because right now they are making great money. But just because I envy them, doesn’t mean that buying Tesla stock now is a good move for me. Have you ever heard the saying “What goes up must come down”?
Well, this statement doesn’t always hold true but when it comes to stock trading it more than likely does. Without getting too much into the technical side of stock trading just know that there are buyers and sellers. Yes, you can sell a stock that you don’t even own. The industry terms for this is short selling. What this means that as a stock price goes up you lose money and the people who bought make money. But if you short sell a stock and the price goes down you make money, you’re betting against it.
It’s the laws of supply and demand and when the demand runs out (people buying) the stock price falls.
Confused yet? Let’s clear it up by going over a couple more examples.
Flashback to 2017 and take a look at Tilray’s (TLRY) stock price to see this in action.
As you can see on the left side of the chart the price is surging (much like Tesla’s). Then the bottom falls out over the next year. People kept commenting that the price will go back up but as you can see it never has.
This isn’t an anomaly. If you don’t take my word for it, let’s look at a chart of something everyone has heard about, bitcoin.
In 2017 everyone was talking about bitcoin. I was asked constantly my thoughts on bitcoin and if I was buying it or not. The answer was always no.
Bitcoin had a crazy run, increasing in value by thousands of percentage points. It made people filthy rich but it also cost people an excessive amount of money. I don’t have the facts, but I’d be willing to bet everything that it made many more people lose money than those that made money.
How could this be possible?
It’s something called FOMO or fear of missing out. When bitcoin started it’s historic run, a single coin cost less than a penny. The problem arose because most people didn’t buy bitcoin when it was that cheap. They bought when a single coin was worth $5,000, $10,000, or even worse, $15,000.
A single coin cost eventually peaked at over $19,000 then the bottom fell out. It fell almost 75% over the next year and those people who bought high were now stuck with an asset that was worth a fraction of what they paid. Bitcoin has eventually leveled out around $9,000 a coin but was that emotional toll of buying an individual stock, security, or coin really worth it? Many people who rode the ride paid much more for their stock than what it’s worth now.
If You’re Going To Buy An Individual Stock Do This…
If you’ve been following Young, Dumb, and NOT Broke?! for any time now, you know that I used to occasionally swing and day trade. It was fun and challenging and for the most part I made money. But there were times when I lost and lost badly. Eventually, I realized I didn’t want to allocate the mental bandwidth to trading that frequently so I changed my strategy.
Do I still own some individual stocks? Yes and here is how they are allocated in my portfolio (this portfolio makes up 5% of my net worth).
- Amazon (AMZN) – 50%
- Twitter (TWTR) – 30%
- Canopy Growth Corp (CGC) – 20%
This portfolio isn’t perfect and may not fit everyone’s risk tolerance but these are companies that I think have long-term value in the world. The key part of that statement is ‘long-term’. I didn’t buy these stocks to hold for a day, a week, or even a month. I bought them to hold for at least a year, if not more.
If you’re looking to buy individual stocks, I encourage you to do it with the mindset that you are going to hold onto it for a long time. Find companies that have good financials, good products, and ones that you personally use. This won’t always equal a great return but it does make investing slightly more fun, to me at least.
What I Would Suggest Instead
For most of you, buying an individual stock is just an awful idea all around. To take it a step further, you probably don’t even need to know what a stock, bond, mutual fund, etc. even is. Instead, what I would suggest you do is buy an index fund on a platform like Wealthfront and continuously fund every month for many many years. Now due to the law, I can’t tell you what index fund to look at, but Vanguard’s Total Stock Market ETF (VTI) sounds like a good place to look.
Again, that wasn’t advice. Just a hunch.
An index fund groups many stocks together into a single fund that you can buy. These funds are professionally managed and you pay a small fee but they give you a higher chance of a better return. When you buy an index fund like VTI, your money is spread out or diversified automatically. Essentially it spreads your eggs out among many baskets.
I have a full module, over 10 lessons, on investing, how to purchase index funds and continuously fund them in my course Money Made Easy. It releases later this spring and if you want to be the first to know and get a hefty discount, then make sure you have taken our Money Personality Quiz. If you click the image below it will take you directly to it. The quiz takes 3 minutes and can help you identify your strengths and weaknesses.
The Bottom Line
Personally, I will always own some individual stocks. Who knows, maybe in a couple of years I might get back into trading seriously. For now, though I’m going to use that time for other things like my relationship, my dog, and reading interesting books (usually about money).
At the end of the day, you can invest your money any way you’d like. If you want to chase an individual stock like Tesla and you’re committed, then go for it. Just know what you’re getting yourself into and don’t overextend your budget. Maybe you make some money or maybe you lose, only time will tell.
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