As an investor, you have the luxury of implementing an investment plan and then sitting back and letting it do its thing – because your time horizon is longer term. As a trader, however, you have to watch the markets every day and ride the wave of emotional ups and downs. In this internet age we live in, with instant news flows and social media platforms like Reddit, it has become fashionable for everyone and anyone to trade in financial instruments. Also, commission-free trading platforms like Robinhood has made it extremely cheap to do so. It is very much like photography. Before the digital camera, and especially the mobile-phone camera, if you wanted a professional photo shoot, you had to pay a professional photographer who knew what he or she was doing. Now, because it is so easy and cheap to take a thousand different shots, everybody imagines him- or herself a professional.
This new liberated way of investing, as with photography, has more to do with luck than expertise. In an environment where markets go up, as they have done for the last twelve years in most countries, people tend to forget that markets can go down as well. If we look at the S&P500 from 2000 to 2012, you will see that investments had no growth and in some years went down by more than 30%. In South Africa we saw a similar trend over the last five years or so. In times like these, the DIY investors often lose everything because they become emotional and try to time the market.
In most cases, if you have not invested in something that was really too expensive, you will make a profit if you give it enough time to go through its cycles. If you overreact, however, you can lose all your money. Take a look at the performance graph below. You will see that all of these asset classes have had multiple negative years but only one has had a cumulative ten-year negative return. If you look at Bitcoin for example, it had two years of more than 50% drawdowns, but a cumulative ten-year return of a lot! So, as a novice trader, if you invested in Bitcoin in 2018 and then lost 73% of your capital, would you have sold your position or would you have ignored the loss?