Are You a Trader or an Investor?

Linda Goin

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In the previous article I mentioned that you might experience some strange emotions as you begin to accumulate shares in your online portfolio. You’ll experience elation as you see your shares and your profits grow in some cases. You’ll also experience defeat when you see share prices wearing the bright red that indicates a loss.

But, you might experience more emotions than these two extremes, and I’d like to talk with you about them. How you handle these feelings will define you as either a trader or an investor.

Say that you’ve decided to invest about $25 — $50 a month into two different stocks. By the end of three months you begin to see how stock share accumulation affects your profits and losses. Three or four shares will bring higher profits will the stock is up, and the same number of shares will also make your losses seem higher.

But, say that you began to accumulate shares in November last year, when the stock market was climbing. By the end of the year you might have felt great about your stock choices. In fact, you couldn’t stay away from the computer screen, because you craved that feeling of self-satisfaction. Over the holidays, you might have bragged about how well you’ve done in the market so far, even as a beginner.

Your confidence swelled to the point that you began to cut your budget anywhere you could to dump more money into those shares. You eliminated the kids’ Saturday afternoon ice cream treat. You neglected to take your clothes to the cleaner, and you terminated all your subscriptions to those book and music clubs.

Those cutbacks aren’t bad in some respects, as you’ve learned what you can live with and without during this process. But, your behavior changed as well. You now focus more on your stock movements than you do on what the kids are doing at any given moment. You can’t live without CNBC, even when your favorite movie is airing. And, you’ve become a real bore to anyone who doesn’t focus on investment strategies.

This change in behavior is trouble for some folks, as it’s a precursor to becoming a trader rather than an investor. A trader is more concerned with quick profits and rapid turnarounds than with slow and steady accumulation. A trader forgets about tax benefits for holding a stock for more than one year, and a trader begins to get itchy fingers as soon as the market tumbles or rises precipitously.

Take, for instance, the dive that the stock market took during the last week in February this year. That dive might have wiped out any and all profits that you made since last November. What did you do when that happened? Did you panic and sell? Or, did you see this dive as an opportunity to accumulate more shares?

That last question is the one that will define you as an investor. I heard this same advice on CNBC from Suze Orman when she answered a question that a viewer posed during that week. The conversation went something like this (paraphrased):

Viewer: I sold all my stocks yesterday when the market dumped. Should I sit on the money and wait to see if the stock market rises, or should I go ahead and buy low now?

Suze (stares at the camera for a second): What are you doing in the stock market? You aren’t an investor, because you didn’t see the opportunities provided by this drop. I hope that the prices stay low for quite some time, because these low prices provide an excellent period to accumulate.

Investors don’t sit in front of their computers all day long to watch every movement in the market. Investors trust their research, and they feel confident about their stock choices. Investors want to hold onto their shares long enough to benefit from tax advantages so that they don’t pay even more for their troubles. Investors don’t continuously buy and sell, because brokerage costs will also eat into profits. Investors know what their kids are doing.

If you did begin to invest in November last year, you probably lost every penny in profit during that last week in February. A trader would freak out trying to outguess what the market would do the next day (let alone the next hour). An investor might breath a sigh of relief, because she would realize that she did, indeed, have a chance to accumulate more shares at a lower price. That, my friends, is great news indeed.

Now this problem may occur to you — you don’t have the money to accumulate more shares at a lower price, do you? No — because you went nuts cutting costs and purchasing more shares when you didn’t need to and now you don’t have the money to purchase those shares on sale.

It’s great to learn what you can live with or without as you become excited about your portfolio accumulations. But, be prepared to sock some money away into a very liquid interest bearing account as well. If you do, then you’ll have the money on hand to accumulate extra shares during a time when you see a great bargain. Otherwise, decide how often you’re going to accumulate shares and stick to that plan. Then, go have some ice cream with the kids.