I like to dabble in stocks and shares. I’m a real beginner, but am in it to make short-term cash – for example, I just sold some shares to pay for my holiday flights in February.
But friends and family keep on at me to play the long game and keep investments for years rather than weeks. They say I’m being a real amateur not to realise this. What do you think?
L.M., via email
Money Psychotherapist Vicky Reynal replies: There are three questions I ask people when they tell me about their investments: Are you fully conscious of the risk you are taking? Are you aware of the emotions driving your choices? And does it fit with your wider strategy and plan? If the answer is yes to all three, then you have the counter arguments to address your family and friends’ worries about your short-term trading.
But if any of them is a negative answer, then there are dangers to consider. Let’s take them one by one.
It’s always worth considering whether beyond the obvious reasons why we invest (to grow our wealth or to make some money fast), there are underlying feelings we are trying to address through the behaviour.
People become hooked on trading because it gives them a rush that feels good in contrast to an emotional dullness or sadness they are afraid to confront.
Yet others might invest because it gives them a sense of control at a time in their lives in which they face uncertainty.
If you have usually been conservative with money and you are finding yourself recently willing to take a lot of risk – this, too, might be a sign that something emotional might be going on. Have you thought this through or is there a part of you that is trying to sabotage your finances?
Is it better to sell stocks and shares for the short-term, like paying for plane tickets, or investing for the future?
If you’ve excluded emotional drivers and this really is about the money, then you need to check that you fully understand the degree of risk that you are taking.
What your family and friends might be warning you about is the fact that investing with a short-term horizon comes with higher risks because the price of stocks is more volatile in the short-term – even experienced investors can lose money trading in the short-term.
If you are clear on the risks, then ask yourself if this amount of risk aligns with your risk tolerance. And, here, I am not just talking about how much money you can afford to lose, but about how much money you can tolerate losing.
People can differ greatly in how they respond to losses, and even the same person during the course of their lifetime might be resilient to risk and losses at one stage of life and respond very differently at a another.
You’ve had good results so far, but what happens if the next time you are counting on holiday money through a trade, the value of your stocks tanks suddenly?
How might it feel if right when you needed the money the value of your stocks is particularly low, making it a bad time to trade?
I have heard of people who resorted to borrowing money from family and friends because they counted on paying the taxman by selling their shares and felt trapped when the value of the one share they had invested in was at a low in January.
Try to imagine how that would feel to you.
As you are a beginner, there might be things in the small print that you might not have considered – like the fees you pay when you trade frequently.
Educating yourself on all the pros and cons of this strategy is a must so that you are not left feeling blindsided down the line.
And, finally, do you have an overall strategy to grow your wealth and how does this trading fit into it? Ideally, you have a plan for your future finances with both long-term investments aimed at growing your wealth alongside the short-term trading.
It sounds like your friends and family are concerned that you might only be focused on short-term wins and you are not planning for the future.
The ‘long game’ that your friends and family are recommending is based on the fact that long-term investments in diversified stocks have historically yielded positive returns: they are not affected by the short-term volatility of markets, but on top of that, they benefit from compounded growth – essentially a snowball effect of returns – which you are missing out on if this is your only form of investing.
I think it’s tempting to allow your recent wins to be proof that you are right, but you have told me that you are new at this.
It is crucial when investing to be humble, curious and to understand risk.
Your friends and family are trying to warn you about the risks of a short-term strategy and the missed opportunities if you are using it to replace a long-term one.
- Do you have a question for Vicky? Email: vicky.reynal@dailymail.co.uk
