For many people, buying and selling shares is a possible ‘get rich quick’ scheme. Clearly, there are times when this will work. Sometimes share prices can move quickly and this can provide investors with high profits in a relatively short space of time.
However, the reality is that the risks of buying and selling over a short time period are significant. Indeed, timing the market could prove to be an inferior strategy when compared to focusing on an investor’s ‘time in the market’.
Perhaps the major risk of short-term investing is the opportunity cost from not holding shares for long enough. Even if a short-term investment works out as planned and an investor generates a high return, they are likely to then sell up in search of another opportunity. However, in many cases the optimum strategy could be to hold on to the company in question, since it may offer even greater growth in the long run.
Likewise, many short-term investors may seek to sell their underperforming shares. This can sometimes be a sound strategy, since there may be better opportunities elsewhere. However, often share prices are volatile and fluctuate in value. This does not necessarily mean they will fail to deliver high growth rates in the long run. Therefore, adopting a patient outlook can be highly worthwhile.
Some short-term investors will seek to take time out from investing if they do not see opportunities to profit. While having assets other than shares is generally a good idea due to the diversification benefits, not having enough exposure to shares means an investor will miss out compounded returns. Over time, they can make a large difference to overall returns, and it is long-term investors who will benefit, rather than their short-termist peers.
In addition, short-term investing is much more expensive than a buy-and-hold strategy. While the cost of buying and selling shares has fallen in recent years, frequent trading can still lead to high commission costs which eat away at overall returns. And with the effect of compounding factored-in, even a small difference in total returns after costs can lead to a significant difference over time.
Quality of life
While the primary reason for investing in shares is to generate a relatively high return in order to meet financial goals, quality of life may also be of importance to some investors. Short-term investing and attempts to ‘get rich quick’ can lead to a significant workload as time is required to continually find new opportunities. This can affect an investor’s quality of life, while the stress and worry of losing money on some investments can do likewise.
Long-term investing is usually less time-intensive, while investors generally find paper losses easier to cope with than ones which are crystallised. Alongside the potential for higher returns, this means that a long-term strategy may be a better option for most people when it comes to buying and selling shares.