Technically, It's Gambling
Trading investments feels more productive than it is.
It’s Saturday morning. You survived. Somehow, by some miracle, drones and missiles launched somewhere in the Middle East missed their target, which was most certainly you based on the intensity of all reports.
We can finally cover our shorts and move on to the next media flash point. I, for one, am excited to overreact to it. Whatever it is, I’m sure it will justify a sixth monitor purchase for the aspiring quant’s at-home trading workstation.
Who knows? Maybe if there are enough computer screens displaying Bollinger bands, the future will be made clear.
When did ‘investing’ become a game anyway? And by ‘investing’, I mean trading. The act of buying or selling a security with little to no attention given to the underlying business.
“Technicals” they say. Why don’t you put your technical data in my suggestion box. It’s located right outside my office on I-75.
Maybe you can look at the historical, ‘technical’, data of I-75 traffic flows to see if that helps you evade the oncoming traffic while you deliver this invaluable information to me.
Something tells me luck would play the greatest role. That is, if you don’t open your eyes and observe the more fundamental, current, situational information.
Nobody in the right mind should make high stakes decisions based solely on historical patterns. Would you drive arrogantly only looking through the review mirror? “Well, the road was straight the past 5 miles”, says the quant driving right into a river.
In my experience, these are the top three reasons people trade:
1. Gamblers’ fallacy – quick, easy money if you just follow the secret formula.
2. Fear - of volatility or of missing out.
3. Entertainment – the expedient prescription for boredom
I’ll give a pass to anyone engaging in trading for the sake of entertainment. But know this, if you find yourself on the winning side of a trade, it’s because of luck and not skill. Either that or you had inside information. Don’t let this lure you into a superiority complex.
The other two reasons can be attributed largely to ignorance.
US stocks have generally moved in an upward direction over time, and not by some thin margin of odds. According to an analysis conducted by Capital Group, the S&P 500 has traded positively in 73% of 1-year periods over the past 94 years. (Capital Group, 2023)
This sure beats the odds of winning the typical game of blackjack, which sits at 49%. With better than 50% odds of winning, most traders should make money over time by default simply because the odds are in their favor.
Nothing says “adda boy” more than trading your account fanatically over the year only to underperform doing ABSOLUTELY nothing but buy and hold. Underperforming long-term averages has never been so much fun. Thanks Robinhood!
This begs the logical question, when should we trade in our accounts? It depends on your investment policy, but generally less is more. The right amount of time to revisit whether your allocation fits your needs is about once per year.
Whether you’re using a passive index fund strategy or a curated portfolio, your investment policy should be grounded in a long-term fundamental thesis. It’s difficult to maintain conviction if you have no idea why you own something.
Did you buy that fund in your 401(k) plan simply because it had the best returns last year? If so, the likelihood that you will abandon this fund when the going gets tough is higher than sunshine during the day. Know what you own and why you own it.
Do yourself a favor, ignore the technicals and find the meaning behind what you’re doing. This is what a good financial educator can help with.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial LLC. Member FINRA/SIPC. Advisory Services offered by National Wealth Management Group LLC, an SEC Registered Investment Advisory and separate entity from LPL Financial LLC.