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Stock Market Investors Are Too Impatient

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In the 1960s, investors had an average holding period for stocks at eight years. You would think that with the spread of information, and a more educated public, the holding period would lengthen as investors realise the benefits of having a long-term approach.

However, a recent article estimated that the average holding period for stock market investors in 2017 was just 22 seconds. Even as investment experts around the world tout the benefits of having a long-term approach, traders and investors are taking the opposite approach of trying to time the market and obtaining a quick buck from each trade.

As such, many investors who have a short-sighted approach of a few months are getting burnt in the market. They are not able to reap the full potential of the stock market as well. In light of this, I thought it might be a good time to reason why many investors who think short-term usually lose money.

Frictional costs

Each trade that investors make incur a commission fee. For long-term investors, this frictional cost of buying and selling stocks does not add up to much, as their average holding period is much longer. They also make far fewer trades, meaning less money seeps into the hands of brokerage firms.

On the other hand, short-term investors, who make multiple trades a day, will have to pay a substantial amount in commissions. This makes it even harder for traders to profit or even break even on their trades.

Even investors who have holding periods of a few months or less may struggle to obtain returns greater than what they pay in commissions.

High-frequency trading tilts the balance

Michael Lewis, in his book, Flash Boys, described the unethical behaviour of high-frequency traders who front run the market.

This book opened the world to the possibility of institutional traders making use of high-speed networks to trade the stock market or forex market ahead of retail investors. This creates an environment where retail investors inevitably have to buy higher and sell lower.

The unfair scenario created by professional traders with faster computers puts individual traders at an even greater disadvantage.

Inability to correctly predict trends

Numerous day-traders or swing traders believe that they can predict if the stock or index that they trade will rise or fall. Unfortunately, not many of these traders have the know-how or expertise to be correct on stock price movements constantly.

Most traders may use the same basic trends such as moving averages or support and resistance. However, these trends can be inaccurate, and traders frequently make wrong predictions.

Furthermore, emotions play a much larger role in short-term trading as compared to long-term investing. Traders who are unable to control their emotions will inevitably make worse decisions.

The Foolish bottom line

Short-term trading may seem like an easy way to make a quick buck for many, especially as news agencies and trading schools tout the ease at which some traders make millions of dollars on it. However, not many people have the expertise or the composure to make profitable short-term trades on the market constantly.

Investors need to know that by trading short-term, they have additional obstacles to overcome. The stock market is great for long-term investors who wish to hold their investments for many years but is unpredictable in the short-term. Therefore, unless we are extremely confident of our abilities, we should leave the short-term trading to the professionals and institutional traders.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.