Volatile Markets & Active Trading

***This post was originally published in PWA’s Newsletter: The Pretirement Press in Q1 2008 and it’s publish date has been edited here to reflect the approximate initial publish date***

The sharp up-and-down in the markets tends to draw more market-timing traders in. These speculators attempt to profit from momentum by buying when the market is going up and selling when it’s going down, creating even more of a whipsaw effect. For the inexperienced investor, it can be tempting to try to pick a top or a bottom in the market and profit from these wide swings. There are four issues with doing this.

1) You need to pick the right top to sell your investments and if you’re wrong you risk missing the upside.

2) You need to pick the right bottom to buy back into your investments.

3) You need to pay taxes when you sell (assuming you have gains), which means you’ll be unable to buy the same amount back later.

4) You pay commissions to your broker each time you make a trade.

Brokers will win with this strategy since they collect trading fees. Uncle Sam will win with this strategy since he collects taxes. A few individuals will win with this strategy if they pick the exit and entry points correctly. Everyone else will lose, and will experience much more long-term volatility than necessary. A much more successful strategy is to work with your advisor to outline your goals, the returns you need to achieve those goals, and implement an asset allocation that is designed to target that return over the timespan you need. You can’t measure it over months, you won’t get the exhilaration of a “winning trade”, and it won’t be as much fun to try. What you will get is enough money to fund your lifelong aspirations and that should be much more meaningful than occasional short-term wins.