These days there is a lot of news about investing. Daytrading in particular is gaining popularity. Daytrading is buying and selling of stocks daily or multiple times a day. You try and time the market, buy low and sell higher later on. People who make a decent amount of money on this tell everybody that wants to hear. They make it sound so easy to make money that you feel like a fool for not doing it. In my opinion, even though the chances of high returns with daytrading, it is like gambling. There has been a lot in the news on cryptocurrency and GameStop stocks for example. A lot of people made great amounts of money and a lot of people lost great amounts of money. The winning and the losing are both part of the gambling. The higher the returns can be, the higher the risk. You hear nobody when they lose an embarrassing amount of money. People who lose a lot of money or that even went into debt for it have a higher change of getting anxiety and depression. We want to avoid all.
To be quite honest, I got on board too. On top of the hype I bought GameStop stocks and a couple of years ago I had some bitcoin and ethereum as well. The crypto doubled and then halved and I sold. When GameStop was all dropping it was not so exciting anymore. Then the whole controversy around the disabled buy button was big I just wanted to be out. I waited a couple of days until the numbers were a little less red and sold all. At a loss that is. Luckily for me I didn’t put a ton of money in and I didn’t sell my other investments for it. I played according to my own investment rules. I can only imagine having sleepless nights and anxiety if I put all my investments on it and lost it overnight. My hard-earned money evaporating over night because of an impulse I couldn’t resist. The horror!
On Reddit I read a good counter argument on why you should take more risk. If you have a lot of money, a 7% return is pretty good and you can be satisfied with it. But if you are left with pennies at the end of the month, 7% is not at all that much. It is more attractive to double your money overnight than to see it grow slowly. Good argument! Although I think if you don’t have spare money, it is even more important to be a bit more conservative. If you live frugal and have to work long and hard for your cash you really don’t want to lose.
Besides, research shows that people who have actively managed investments, get more or less the same returns as people who put it in a passive fund or ETF. An ETF is an Exchange Traded Fund or a basket full of stocks following a certain index. For example the S&P500. It contains stocks of the 500 best performing companies in the US measured on their market capitalization. The biggest companies have a bigger share than the smaller ones. If you put your money in the ETF of the S&P500, you are investing in 500 different companies at once. The combination of the good spread and therefore less risk, and the low fees because there is no middle manager trading your stocks, makes that ETFs almost always outperform the active managed funds. This is the path that takes longer and is less exciting than daytrading. In my opinion it is the right path.
Actively managed funds usually cost between 1-2% in managing funds. This price is fixed, even if the manager is doing worse than the index fund. Research shows it is nearly impossible to beat the market in the long run. And this is for people who studied to do this and who are doing this as their occupation. If you do it yourself, chances of outperforming the market is even harder.
Let’s make a calculation shall we. Ok, so you have 10.000 euros and you put them in an index fund and on average you get a 7% return. You leave them untouched for 30 years. Without putting even one euro extra in, after 30 years you will have 71.142,57 euro. With service fees of 0,1% for passive investments you have a return of 6,9% per year. After 30 years this is 69.239,42 euros. It’s a difference of 1906,15 or 2,67% and not 0,1%.
With the service fees of an active manager of 2% annually and an equal return of 7%, after 30 years you will have 41.161,36 euros. It’s a 29.981,21 euro difference or 42,14%!!! The costs that only seemed 2% per year are astronomically higher and the amount at the end is so much smaller.
I made a spreadsheet below.
So we calculated the difference between passive and active funds. I’m not doing the same for daytrading. It is unpredictable. You take a lot more risk when doing it, it will cost you more time and the transaction fees are higher than with passive trading. Hopefully you see the difference now between daytrading, active investing and passive investing.
Have you ever invested in cryptocurrency or index funds? Let me know in the comments!
Till next time,
Elske
I am not a Financial advisor nor am I YOUR financial advisor. I am not a trained financial professional. This blog is for entertainment purposes only.
