There seems to be a tough of war between traders and investors, even though both categories have basically the same objective, which is to preserve their wealth against the diminishing purchasing power of money by placing them in assets that generate returns over a given period of time. However, there are some differences between investing and trading and both serve different roles, which will be our main topic today.
Short-term vs. long-term
Generally speaking, a professional investor wants to make long-term investment decisions, choosing assets like stocks, precious metals, , etc. that proved to have a stable and positive performance over the years. We say that these assets are low-beta, meaning they have relatively-low volatility and price swings are moderate. Most of the time, these assets are not just able to provide returns based on the rising of price, but they also carry an annual dividend.
On the other hand, when it comes to trading, the focus is more on the short-term. Traders, aside from carry traders, look for trading opportunities that could last for as low as a few seconds and no more than a few weeks. The goal of trading is to exploit short market movements, without any major focus on fundamental factors and without any dividend involved.
Markets like a rollercoaster
It’s in the nature of financial markets to move up and down, given the way our economies work. As , founder of Bridgewater Associated and one of the biggest investors in the world, mentioned several times, there are two main factors that drive economic activity: productivity and credit. Productivity is not volatile in the long-run but credit is, and it is the main factor why we have economic cycles.
If we look back over the last few decades, we can notice that, in the long run, assets managed to outperform cash. Yet, in the process, we have several economic and financial crises, some of which hurt investing portfolios badly.
In order to counteract these bad periods, trading with a could be a solution, given that it could both help an investor to hedge his portfolio, while also enabling traders to profit from some volatile market moves. The bottom line is that falling into the dispute of traders and investors turns out to be unproductive and the ideal way is to find a combination between the two if you want to generate consistent returns.