What Kind of Investor Are You?

Written By Alexander Boulden

Posted February 14, 2024

Dear Reader,

With the S&P and Nasdaq reaching all-time highs, Bitcoin breaking $50,000, and chip companies going to the moon, it’s got a lot of people talking about the stock market.

There’s a lot of good advice but also a lot of bad advice out there.

For example, for the last six months, Jim Cramer has been saying that the market is overvalued and that it can’t possibly go up any further.

Wrong.

He said the market was going up, just before the CPI numbers came out this week which caused selling pressure.

Wrong again.

The point is you’ve got to be careful out there.

Nearly every day I hear someone on the street talking about crypto or the stock market.

This, too, is a good sign but also a bad one.

We all know the supposed tale of how Joseph Kennedy made his family fortune.

Time magazine wrote the following about it…

There is a famous story, we don’t know if it’s true, about how in the late summer of 1929, a shoe-shine boy gave Joe Kennedy stock tips, and Kennedy, being a wise old investor, thought, “If shoe shine boys are giving stock tips, then it’s time to get out of the market.”

While the rest of his fellow bigshot investors were pumping money into the stock market, Kennedy saw signs that stocks were wildly overvalued. He sold off most of his stock holdings before the 1929 crash, and even better, he started shorting stocks, betting that their prices would go down. When everyone else lost their shirts on Black Tuesday, Kennedy walked away richer than ever.

FOMO, or the fear of missing out, really does affect day-to-day market behavior.

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When times are good, times are really good.

When times are bad, times are really bad.

When the market’s good, investors who made the right moves feel like geniuses, only to be crushed when the market goes the other way.

And it always does, by the way.

Now, I’m not saying this is going to happen right now, but the point is there’s an easy way to invest and a hard way.

Let’s go over the hard way first…

Trading

There are two main types of investing: active and passive.

To me, active investing is also called trading and can be taken to the extreme with day trading, which is a very difficult job. Most people who dabble in stocks have attempted to day trade at one point in their investing career only to give it up soon after because the odds are against them.

Trading typically means buying single stocks with the goal of outperforming the market or a specific benchmark. Portfolio managers or individual investors actively make decisions to buy or sell securities based on their analysis of market conditions, economic trends, and individual company performance.

Typically, active investors believe they can identify mispriced securities and capitalize on market inefficiencies. Most active investors are in fact day traders who frequently buy and sell securities. They do their own research and market analysis.

A drawback here is that frequent trading involves higher transaction fees. Not to mention, you’re less diversified and if any of your positions go against you, you can lose money in a hurry.

By all means, if you want the sleepless nights and excess risk, be my guest. But you can’t do that forever.

Not to mention, it’s believed that only 5% of day traders actually make money in any given year.

So be careful out there.

Also, most of the market news you hear is made to drum up emotion and make you do something stupid with your money.

There’s a better way to invest, however…

Care-Free Investing

On the other hand, there’s passive investing, or what I call carefree investing. That’s because, with passive investing, you can go about your life and not worry about any of the noise coming from the news or your genius friends.

You just put your money into your account whenever it works for you, and that’s it. You may do this through your retirement account like a 401(k) or an individual retirement account (IRA).

Passive investors build portfolios that closely mimic the composition of a chosen index, and they typically hold onto these investments for the long term. It involves less frequent buying and selling, as the goal is to maintain a portfolio that mirrors the benchmark like the S&P 500.

Passive investing generally relies on a “buy and hold” strategy, minimizing the need for continuous monitoring, and lowering transaction fees in the process.

Passive investors believe that over the long term, markets are efficient, and it’s challenging to consistently beat the market through active management.

Pros and Cons

Now, before you go setting up shop with your new day trading firm, let’s look at the pros and cons of each style.

Active Investing:

  • Pros: Potential for outperformance, flexibility in portfolio management, ability to adapt to changing market conditions.
  • Cons: Higher fees, increased transaction costs, and the challenge of consistently outperforming the market.

Passive Investing:

  • Pros: Lower fees, reduced transaction costs, simplicity, and the likelihood of achieving market returns.
  • Cons: No attempt to outperform the market actively, exposure to market downturns without attempts to mitigate risks.

Investors often choose between active and passive strategies based on their investment goals, risk tolerance, time horizon, and beliefs about market efficiency. Some investors also adopt a hybrid approach, incorporating elements of both active and passive strategies into their portfolios.

Sometimes even both strategies can fall short and you have to do something no one else is doing, as in our example above with Joseph Kennedy. If you spot something big on the horizon and no one else sees it, that’s when fortunes are made.

And whatever you do, don’t use leverage. That’s what hurt so many people, as the Time article reveals:

“For so many months so many people had saved money and borrowed money and borrowed on their borrowings to possess themselves of the little pieces of paper by virtue of which they became partners in U. S. Industry,” TIME wrote of the mood on that first frightening day. “Now they were trying to get rid of them even more frantically than they had tried to get them.”

The fact that the market had fallen 10% before the bankers intervened made other people wary of the market and probably they’re the ones who started selling the following Monday and Tuesday. [And] easy money is good for the stock market, which is fairly true. The Federal Reserve in the summer of 1929 was worried about the excess of speculation so they actually did a tightening at the beginning of September.

There’s so much more to cover here, but we’ll leave it at that for now.

Next time on this investor series, we’ll cover index funds vs ETFs and even look at some tax implications.

And if you want access to our care-free dividend portfolio, make sure to click this link right here.

Stay frosty,

Alexander Boulden
Editor, Wealth Daily

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After Alexander’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing.

Alexander is the investment director of Insider Stakeout — a weekly investment advisory service dedicated to tracking the smartest money on the planet so that his readers can achieve life-altering, market-beating returns. He also serves at the managing editor for R.I.C.H. Report, a comprehensive service that uses the highest-quality investment research and strategies that guides its members in growing their wealth on top of preserving it.

Check out his editor’s page here.

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