Advise long term trading vs short term trading

[aim-high]

Hi,

This whole year I have been really doing short term trading (infact even swing trading) with 50K. So, I buy a stock with lets say 20K, once the stock jumps 2 or 3%, i sell, take the profits out and then reinvest the 20K in a different company.
If stock goes down, I dont sell it for a loss. Keep it until it comes up and then sell it. I know i need to pay short term capital gain since i am buying and selling within a year. Is this strategy better OR is it better to put the entire 50K in few stocks and leave it for the long term. I am making money so I am not greedy or complaining. i just want to know if my strategy is good. Please advise.

--Sunray

[disneysteve]

I'm curious if you have compared your overall return to what you would have made putting the 50K in a total market index fund at the start of the year.

You keep your losers and sell your winners. Why? I have no idea what stocks you've bought and sold but I'd be willing to bet you would have made more money had you dumped the losers and held onto the winners.

Keep in mind that capital losses offset capital gains at tax time, so unloading the losers can minimize the taxes you have to pay when you sell winners.

It's nice that you're making money, but no, your strategy is not a good one. Or maybe it might be but you've given no basis to judge. You're selling stocks when they go up 2 or 3%. VTI, Vanguard's Total Stock Market ETF, is up 25% year to date. Have your picks earned you more than 25%?

[aim-high]

Thanks for responding.
In my case, beginning of this year, I started off with 50K. Got various stocks until now and overall profit is about 21K, meaning, I have taken out overall 21K profits and I still have ~50K invested in few stocks now.
In terms of taxes, I think i wud have to pay around 40% of 21K which is around $8K but I can keep the remaining 13K to myself.

If i had decided to go with long term route, would it have been better if I sold VTI or just hold on to it. Where i am getting at is, at the end of the year, shouldn't I look at the 13K profits and be happy that I made money as apposed to seeing a long term stock higher in value on paper cos next year who knows VTI might go down.

--Sunray

[disneysteve]

Thanks for responding.
In my case, beginning of this year, I started off with 50K. Got various stocks until now and overall profit is about 21K, meaning, I have taken out overall 21K profits and I still have ~50K invested in few stocks now.
In terms of taxes, I think i wud have to pay around 40% of 21K which is around $8K but I can keep the remaining 13K to myself.

If i had decided to go with long term route, would it have been better if I sold VTI or just hold on to it. Where i am getting at is, at the end of the year, shouldn't I look at the 13K profits and be happy that I made money as apposed to seeing a long term stock higher in value on paper cos next year who knows VTI might go down.

--Sunray

Why are you investing? What's your goal? Is it short term profit or long term financial success? What's the money for?

For most of us, our equity investing tends to be part of our retirement planning so we're not terribly concerned with short term performance since we're going to have that money invested for multiple decades. Even now at age 57 and contemplating retirement in the relatively near future, I still expect to have my stock investments for another 30 years, maybe longer especially if my daughter inherits some of them when I die.

My point is that most of us aren't investing short term money in stocks. It's nice that you made a quick profit, but only if that was your goal. It's not my goal with my investments. My goal is to build wealth over time and become financially independent so that I no longer need to work. That is best done (in my opinion) by buying and holding long term.

VTI might go down, or it might keep going up. Nobody knows. The 50K you have invested now might go down, or it might keep going up. Nobody knows. Market timing doesn't work because none of us can predict the future. You can't look at short term results and think you're some sort of investing genius because you made money, especially in the midst of a tremendous bull market. The only true measure of success is how your portfolio performs over years and decades compared to an appropriate benchmark index.

[aim-high]

The 50K is kind of play money.I have other investments in 401k, MF, ETFs etc (which i dont want to touch until after retirement). My goal is make profits from this 50K. I totally understand I could be lucky this year because the market kept going up but my strategy of investing in the same stocks next year may not work if the stocks were to go down or there is a bear market. I have about 20 more years to retire so wanting to check if my strategy of picking stocks work each year, is there any harm in doing in what i am doing eventhough i know i have to pay capital gain taxes.

--Sunray

[disneysteve]

The 50K is kind of play money.

is there any harm in doing in what i am doing

If all of your finances are in order, you're consumer debt-free or at least have a solid plan to repay any debt, and you are saving adequately for retirement not counting this 50K, then no, there's no harm in having some fun as long as this is money you can afford to lose without derailing your long term goals.

Are you going to beat the market in the long run? Highly unlikely. But again, this is play money. You're not going to beat the house long term at the casino either but that doesn't mean it isn't fun to go play now and then.

[Singuy]

I believe your strategy of selling for a few percent gain and then hold if the stock drops will work until it doesn't. If you were to do this, at least pick a company you know the ins and out of so then you are pretty confident that the drop is temporary. Many people having no idea what they bought(as in their financials and what is causing their stock movements) and end up holding the bag forever. If I get a dime for every company that shoots to the sky and then take a long term dump for months on end, sometimes even dropping below their ipo pricing.

So I would

1. Study the company well enough that you are comfortable with a drop and you are certain enough that it's short term

2. Study technical analysis at the bare minimum as this will give you an advantage. Good TA traders can come out positive 65% of the time. However if you don't understand the company, you can just bag hold and see 21k gains disappear as you are stuck in a company you are not willing to sell.

I am a long term holder kind of guy and have made gains akin to a lottery winner. This would never happen if I was a short term trader. I will need all sorts of luck to turn say 12k into a 350k position like one of my long term holds.

[aim-high]

Singuy, Thanks for your response. Yes I mostly invest in companies that are typically 30B - 40B in Market cap. I am in technology field so I definitely have knowledge in the tech companies that i am investing. Ofcourse, Tech went up this year so i might have gotten lucky. Few companies that i have invested are outside of Tech but I definitely do some research instead of blindingly putting money.

For the past few months, I have been reading about technical analysis so it kind of helps in entry and exit but i am no way close to calling myself an expert in this.