Get rich in the stock market! You hear this all over the news. What does it actually mean? Do you just take your money, open a Robinhood Account, and throw it into whatever the hot new stock is? People are all over the media touting the millions they made a few months ago doing just this but that’s not the best idea for long term profits. So what’s the difference between Investing vs Day Trading?
Mr. Bean and I have been Investing for the last 15 years, (Millionaire Next Door Style) we like it, it definitely works! But this year, Mr. Bean decided he wanted to try his hand in the world of Day-Trading. So we did our research and dedicated 1% of our net worth to his Day-Trading adventure. We figured it would be enough to get started, hoping he gets good and it really takes off but not so much that we’d be screwed if it was all lost. Here are the basics of what we’ve learned:
What is Investing?
(Simple, Long-Term Wealth Building)
Investing is Long-term-
Most investing is done in retirement accounts like 401ks or IRAs. These are meant to grow until the time you reach 59 ½ . They are tax sheltered until you reach full retirement age, allowing taxes to stay at a minimum for as long as possible while you take advantage of compound interest over the years.
If you decide to invest outside of retirement accounts, like in a regular brokerage account, most investments are long term; which in tax terms, means more than a year. This allows for lower long-term capital gains taxes instead of regular income taxes with the lowest possible tax of 0% up to $40,400 for a single person and $80,800 for a married couple filing jointly in 2021, and the highest at only 20%.
Investing is Passive-
When investing, you should be setting yourself up to automatically contribute a set amount every month or pay check. This is done via direct deposit from your employer or by auto bank transfers you create, you should never have to think about it once it’s all set up..
You should be putting your money into easy to understand, low cost funds. (We use Vanguard index funds but there’s also Fidelity and some others popping up.) This could be an age based fund, often decided by your estimated retirement date, or a variety of total market stocks and bond funds. Once you set up your automatic contribution, the only thing you need to worry about is a possible once a year rebalance to ensure you have the correct balance of growth vs income funds for your current stage of life. (Higher growth when you’re younger and, usually, higher income as you get closer to retirement age. But it totally depends on your personal situation.)
Once you set up your automatic contributions and purchases, you shouldn’t have to worry about your investments much except to check your net worth or throw in the occasional surprise money. (Yay, tax refunds and end of year bonuses!)
“Guaranteed” Long-Term Growth-
The overall average annual stock market return for the last 80+ years is about 9%. That means, (so long the market continues to follow a similar growth pattern) if you stick all your money into a Total Stock Market Index Fund and just let it grow, you can expect to receive an average of 9% returns. But this number is not guaranteed every year, some years it may be much lower, even negative, and some years, like the first half of 2021 it can be as high as 30+%. But overall, if you keep your money invested for 5+ years, you should expect to receive about a 9% annual return.
What is Day Trading?
(Gambling in Vegas, unless you are ready to put in a Sh*t load of work and effort)
Day Trading is Short-Term
By definition, day trading usually takes place within a day or just a few days. You buy stock, watch it closely, and sell it right away when you see the pattern changing. This short term ownership causes short term capital gains tax. The government sees this as “easy money” and wants to make sure they get their cut. Short term capital gains are taxed like normal income. So they will count towards taxes like a regular paycheck with the lowest possible bracket being 10% and the highest at 37%.
Day Trading is Heavily Involved-
Unlike investing, day trading requires your direct attention. You must research and track the companies you plan to buy. You have to follow the news for possible changes in company value. In order to do it well, researching companies and market trends can take hours a day.
Then you must make sure you are available when the market opens. For those on the east coast, it may not be such a big deal, but for those on the west coast, or like us here in Hawaii, that means being up at 3am to be there for the opening bell.
Yes, you can set up calls and puts, stop losses, and any other number of things to make it easier but in order to really be successful, day-trading is anything but passive.
No Guaranteed Profit-
There are tons of people out there on Instagram and Google News who tell all about how they became millionaires overnight trading stock, but those people are often the exception. For most who decide to dip their toes into day trading, the likelihood is they lose more often than they win. It takes a lot of work to truly understand the market and get good at actually making a consistent profit. Huge companies spend millions developing algorithms to try to beat the market; when you day trade on your own, you are going up against those huge companies.
I’m not saying it can’t be done, tons of people have turned day trading into their full time job. But you must understand, day trading is not earning a quick buck for an hour of work a day, it takes a lot of work, and even then, profits are not always guaranteed. You have to separate your emotions from your trades or else you can end up losing big!
We are only a few months in on Mr. Bean’s Day-Trading Adventure. There have been some positive days and some days in which he ended up holding way longer than planned because the stocks dipped lower than anticipated while he was “busy at his real job” and hadn’t learned all the tricks yet. But he’s determined to learn as much as possible to really give this thing a try. (HumbledTrader has become one of his favorite YouTubers) I’m just glad we have our regular investments chugging away in the background as they always have been. 🙂
Have you ever considered dabbling in day-trading? Or do you prefer the constant growth and ease of long term investing? Would you like updates on Mr. Bean’s Day-Trading Adventure?