Thursday, September 17, 2009

Trading vs Investing

The volatility of 2008 has many individuals asking is trading rather than investing more appropriate in this market environment? This question has surfaced in the past and is always associated with market volatility & human emotions.

We would all love to have the unique ability to time the markets. Buy low & sell high. It sounds simple enough. This would maximize profits and minimize losses. We all get a hunch now & then and feel we know when to head for the exit signs. We are then faced with a two fold endeavor. Getting the first part right is half the battle. When to get back into the market becomes problematic.

Many individuals bailed in the latter part of 2008. They locked in the losses for the year and remain sitting on the sidelines in 2009. Yes, they avoided the Q1 declines of this year, but most are still waiting for the 'right' time to get back into the game. The S&P500 has now risen 50% since the March lows and 18% since January 1st. Sometimes the angst of not losing money gets trumped by missing a great opportunity.

Most investors should stay fully invested. It may be difficult at times. We're all human and the 24 hour news media provokes emotions. Allocations can be altered to rebalance investments or better align objectives. Liquidating and going to cash is not only extreme in nature, but almost always fatal to your financial plan.

Actively managed mutual funds and privately managed portfolios have full-time Portfolio Managers. Their sole job is manage our money. Let them do their job! They will position the portfolio(s) to maximize objectives and make changes where appropriate. These are not static portfolios that sit tight through good/bad times. Mutual fund activity can be verified through turnover ratios. Simply put, this figure reflects account turnover. Thus, a portfolio with a 40% turnover ratio means 4 of 10 stocks were sold during the calendar year. Value funds tend to have less turnover than growth oriented funds. To see your mutual fund account activity, go to

It may sound logical to trade your investment account, but prudent investors know that market timing is an extremely difficult game to win. Simply staying invested within your risk tolerance is the key to long term success. Should you feel the urge to trade stocks, use discretionary funds and open a discount brokerage account (i.e. TD Ameritrade).

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