Why Is Trading So Hard and Why Do People Do It?
Trading in the stock market is often perceived as a quick path to wealth, but the reality is far more complex and challenging. The truth is that if something happens quickly, it most likely ends just as fast. This principle holds true for many aspects of life, including meaningful and lasting achievements, which typically require time, investment, and sacrifice.
Investing in the stock market follows the same principle. Successful traders who amass significant wealth through day trading are extremely rare. While you may have heard anecdotal stories of individuals striking it rich by making timely trades, these cases are exceptions, not the rule. The odds of becoming one of these successful traders are incredibly slim—about one in a million.
Consider the numbers: with a population of roughly 350 million people in the United States, only around 350 might achieve extraordinary success in day trading. The rest, the vast majority, often experience significant losses. The harsh reality is that even if you managed to get one trade right, the numerous wrong trades leading up to it could bankrupt you multiple times over.
Day trading can be likened to gambling. Despite rigorous research and technical analysis, such as charting the last 1,000 days with moving averages and identifying "breakout" opportunities, past performance does not guarantee future results. This unpredictability makes trading akin to betting on red at a roulette table.
For those who do engage in day trading, they inadvertently benefit long-term investors. For example, someone who holds onto stocks like Nvidia over decades can reap significant rewards, thanks in part to the stability and growth of the market over time. This approach contrasts sharply with the frequent trading mindset, where the focus is on short-term gains rather than long-term value.
The world's greatest trader, Warren Buffett, is not a trader in the conventional sense. He is an investor who epitomizes the "buy and hold" strategy. Buffett's success comes from identifying good companies and holding onto them for the long term. His advice to average investors is simple: find solid companies and hold onto them, allowing compound interest and market growth to work in your favor.
For most investors, especially those with less than $10 million in investable assets, a different approach may be more suitable. One such strategy is the 70/25/5 rule:
70% in the S&P 500: This "basket" includes the 500 largest companies in the USA, providing diversification and stability.
25% in industry-leading stocks from essential sectors like telecommunications, utilities, and technology.
5% in cash: This is reserved for opportunities during market downturns.
Even if the 25% allocation were to go to zero, the 70% in the S&P 500 is likely to double over a decade, given the historical average return of approximately 10%. This method aligns closely with Buffett's advice to dollar-cost average into the S&P 500.
Buffett once remarked during a period of market turmoil that while he couldn't predict the exact level of the S&P 500 in 20 years, he was confident it would be higher. This underscores the importance of a long-term perspective in investing.
Time is the most critical factor in investing. More than the amount you invest or your income, the duration of your investment horizon determines your potential for growth. Historical data shows that holding through downturns and remaining patient can yield significant rewards. For reference please see the following chart showing how quickly recent down markets rebounded:
does not include great depression which took roughly 2x as long to rebound.
In conclusion, while trading may seem appealing, it often equates to gambling with high risks and low odds of success. For most investors, a disciplined, long-term strategy focused on holding quality investments is a more reliable path to financial growth. If you're interested in professional insights and monthly stock recommendations, consider subscribing to our newsletter, The Trading Desk, at 77financialgroup.com. We provide valuable information on "Stocks to Watch" and market commentary to help you navigate your investing journey with confidence.
Remember, in investing, patience and a long-term perspective are your greatest allies.