While the idea of buying and selling FTSE 100 shares in a short period of time in order to make a quick profit sounds appealing, doing so in practice can be hugely challenging.
Not only are there additional costs in terms of commission, trading shares also equates to significant effort on the part of the individual. And with short-term price movements often being exceptionally difficult to accurately predict on a regular basis, many traders can generate losses, even in a short period of time.
As such, it could be a good idea to invest in FTSE 100 stocks through a buy-and-hold strategy, rather than looking to trade them in a short time period. Not only could this mean less effort, stress and worry, the returns on offer over the long run may prove to be far more impressive.
Over the long term, the FTSE 100 generally offers an annualised total return in the high single-digits. While this may not seem like a significant return to some people, over a numbers of years, the impact of compounding can produce a large nest egg.
For example, investing £250 per month over the course of 30 years would lead to a portfolio valued at over £280,000, assuming a 7% annual return. Investing £1,000 per month could lead to a portfolio valued at over £1.1m within the same time period. Put your money into a Stocks and Shares ISA and it’s also protected from the taxman.
As such, investors may not need to generate exceptional returns in order to build a sizeable portfolio in the long run. As long as they are able to generate a consistent return, year-in and year-out, they may be able to achieve their financial goals simply from obtaining the returns that are available from the FTSE 100.
Although it is possible for traders to outperform buy-and-hold investors for a while, doing so consistently over a sustained period is challenging. Market volatility, and a wide range of factors that affect share prices, can make the task of buying and selling in order to make a profit in a short space of time exceptionally difficult.
As such, the vast majority of private investors who use products such as CFDs and spread betting lose money overall. And while some traders are able to make large returns, the effort required in doing so may make it a somewhat undesirable strategy to follow.
Certainly, trading can be more exciting than buy-and-hold investing. It provides the opportunity to make a quick profit, which is something that appeals to everyone. However, the risk involved in doing so could make it an unwise move for many people.
With the FTSE 100 appearing to offer a wide margin of safety at the present time, as evidenced by its 4.5% dividend yield, now could be an opportune moment to buy a range of its constituents. Holding on to them and allowing them to fully realise their potential could be a shrewd move, while selling them after a modest rise may equate to an opportunity cost for the investor.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.