Are you a Trader or an Investor?
By LouAnn Schulfer, AWMA®, AIF®
It may sound like semantics but empirically, a trader is very different from an investor. Either is perfectly fine as long as you don’t confuse the two, and know which you are. Using the stock market as one example, a trader is someone who buys stocks due to their position in the market with a plan to react swiftly when certain valuation targets are reached, either in profit or loss. An investor, on the other hand, is someone who buys shares of companies whom they’ve researched and feel comfortable investing in with the intention to profit from both dividends and capital appreciation over a longer time horizon. To compound the benefit, dividends are reinvested into more shares. An investor monitors the valuation of their security and if the price drops, analyzes the reason and determines whether the decline affects the long term viability of owning the stock. The reaction to volatility is very different in traders versus investors. The trader reacts regardless of reason for price movements. The investor continues to hold if the fundamentals of the company have not significantly changed, much like you would if you were the sole owner of that particular company. The investor’s discipline is to NOT react to short term volatility, but rather with self-control and temperance with one eye on the economy, again, much like you would if you were the direct owner of your own business.
Sometimes in market volatility investors forget their disciplines and react like traders, but with no strategy or discipline. Don’t get me wrong, I am not advocating that you unequivocally hold all of your investments regardless of circumstances. In fact, I am an advocate of active management of investments based upon their fundamentals, technical indicators, quantitative analysis, and their relative strength as well as cycles of economic health and deterioration. But investors can get burned when they forget that they are investors and allow their emotions to get the best of them, reacting like traders.
Volatility is normal behavior for daily traded investments and pullbacks are expected as part of normal market cycles. While it may be uncomfortable to go through, volatility and pullbacks are like turbulence in an airplane. A few bumps does not mean the plane is going down. My advice to you is to remember which you are – a trader or an investor, and make sure your disciplines remain congruent and consistent with who you are, as either a trader or an investor.
LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or [email protected]. www.SchulferAndAssociates.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. All investing involves risk including loss of principal. No strategy assures success or protects against loss.