In today’s fast-paced financial markets, it’s easy to get caught up in the excitement of trading. The promise of quick profits and the thrill of making swift investment decisions can be enticing. However, what many investors fail to realise is that overtrading can occur and can often be the downfall of their investment returns.
Patience is a virtue
Make sure you are on course at all times. Wether you take a active, hybrid or passive approach, make sure your passive strategy of investment is consistent towards your goals. Financial advisors can add value by making sure you are on the right track towards your investment goals and the full benefits of an asset allocation and investing plan can take time to manifest itself.
Persistently adjusting investment strategies and portfolio composition may lead to unexpected and uncompensated risks in addition to lower returns due to higher transaction costs. Rather than using the need to trade, speak to your financial advisor about the noise of the market and what effect it has on your portfolio.
If you have a globally diversified portfolio, the short-term effects of one or two companies will not have a big effect on your portfolio.
The damage of overtrading
Overtrading refers to the excessive buying and selling of securities within a short period. While it may seem like a proactive strategy to maximise profits, it comes with its fair share of risks. One of the main risks associated with overtrading is the impact on investment returns.
When you trade too often, you expose yourself to increased transaction costs. Each trade incurs fees, which may include commissions and bid-offer spreads, which will eat into your potential gains. Over time, these costs can accumulate, significantly reducing your overall investment returns.
The allure of trading often leads investors to make common mistakes. One of the most prevalent mistakes is chasing short-term market trends. Many investors believe they can time the market and profit from short-term price fluctuations. However, attempting to predict short-term market movements is a difficult task that even seasoned professionals struggle with.
‘It’s not about timing the market, it’s about time in the market.’
The psychology behind trading
The fear of missing out (FOMO) when digesting news often drives investors to engage in more trading. They may feel the need to profit from quick trades and feel compelled to do the same. However, FOMO can cloud judgment and lead to irrational investment decisions.
We are firm believers in the market price absorbing all available information, the price is right in the market. This does not imply that the price is always correct, but investors might accept that the market price is the most accurate assessment of the current actual value.
Another mistake often made when overtrading is succumbing to emotional decision-making. The fast-paced nature of trading can lead to impulsive actions based on fear or greed. Emotional decisions are rarely rational and can often result in poor investment decisions.
A common psychological bias known as overconfidence can contribute to overtrading. Investors may believe they have superior knowledge or skills that allow them to outperform the market. While confidence is important in investing, overconfidence can lead to excessive risk-taking and poor decision-making.
Long-term investment vs. overtrading
A long-term investment approach offers several advantages over frequent trading. By holding investments for the long haul, you benefit from the power of compounding returns. Over time, your investments have the opportunity to grow exponentially, maximizing your overall returns.
Long-term investing also allows you to avoid unnecessary transaction costs and taxes. By reducing the frequency of buying and selling, you minimize the impact of fees and taxes on your investment returns. Additionally, a long-term focus promotes a more patient and disciplined investing mindset, helping you avoid emotional decision-making.
Balancing risk and reward in investment
Investing is inherently associated with risk, but it’s essential to strike a balance between risk and reward. Trading often involves taking on excessive risk in pursuit of quick profits. While this approach can yield short-term gains, it might also expose you to significant losses.
By taking a more measured approach to investing, focus on managing risk while seeking reasonable returns. Diversifying your portfolio across different asset classes and sectors can help spread risk and reduce the impact of any single investment. Regularly reviewing and rebalancing your portfolio with your financial advisor or financial planner ensures that you stay aligned with your risk tolerance and investment goals.
Seeking professional advice for investment decisions
While managing your investments on your own can be rewarding, seeking professional advice can provide valuable insights and expertise. Financial advisors can help you develop a customised investment plan based on your specific goals and risk tolerances. They can also provide ongoing guidance and support, ensuring that your investment strategy remains on track.
To learn more about planning, contact us for a free initial discussion.
While trading may seem enticing, it can often lead to diminished investment returns. Resist the urge to constantly monitor your investments. Constantly checking stock prices and news updates can fuel impulsive trading. Instead, set clear investment goals and establish a disciplined approach to monitoring your portfolio. This way, you can avoid making decisions based on short-term market movements. Remember, a measured approach to investing can lead to greater success in the long run.