There are three important differences between investment and trade. Missing them can cause confusion. A beginner operator, for example, can use the terms indistinctly and apply their rules incorrectly with mixed and unrepeatable results. Investment and trade become more effective when their differences are clearly recognized. The objective of an investor is to assume the long-term property of an instrument with a high level of confidence that it will continuously increase its value. A trader buys and sells to capitalize short-term relative changes in value with a somewhat lower confidence level. The goals, time frame and confidence levels can be used to delineate two completely different sets of rules. This will not be an exhaustive discussion of these rule one investing, but rather aims to highlight some important practical implications of their differences. Long-term investment is analyzed first, followed by short-term trading.
My mentor, Dr. Stephen Cooper, defines the short-term investment as buying and maintaining an instrument for 5 years or more. The reason for this apparently limited definition is that when one invests in the long term, the idea is "buy and hold" or "buy and forget". To do this, it is necessary to remove the emotions of greed and fear from the equation. Mutual funds are favored by their professional management and, naturally, diversify their investment in dozens or even hundreds of shares. This does not simply mean any mutual fund and that does not mean that one has to remain with the same mutual fund all the time. But it implies that one remains within the investment class. First, the fund in question must have at least a 5 or 10 year history of annual proven earnings. You should feel confident that the investment is reasonably safe. It is not continuously watching the markets to take advantage of or avoid short-term rises and falls. You have a plan Second, the performance of the instrument in question must be measured in terms of a well-defined reference point. One of those benchmarks is the S & P 500 index, which is an average of the performance of 500 of the largest and best performing shares in the US markets. Looking back until the 1930s, in any period of 5 years, the S & P 500 index has gained a price around 96% of the time. This is quite remarkable. If the window is extended to 10 years, it is found that in a period of 10 years, the Index has won the price 100% of the time. The S & P500 index has gained an average of 10.9% per year over the past 10 years. Then, the S & P500 index is the reference point. If only one invests in the S & P500 index, you can expect to earn, on average, around 10.9% per year. There are many ways to enter this type of investment. One way is to buy the SPY quote symbol, which is a traded fund that tracks the S & P500 and is traded as an action. Or, one can buy a mutual fund that tracks the S & P500, such as the Vanguard S & P 500 Index Fund with a VFINX trading symbol. There are others too. Yahoo.com has a mutual fund filter that lists the scores of mutual funds that have annual returns of over 20% in the last 5 years. However, one should try to find a filter that provides performance for the last 10 years or more, if possible. To put this in perspective, 90% of the approximately 10,000 mutual funds that exist do not work as well as the S & P500 each year.
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