In the series “Money Bear Club Answers”, Money Bear Club will publish the best answers from its Quora profile. The answers will range widely from business and investing, to budgeting and the philosophy of the everyday life. Read on to find out more unconventional perspectives and solutions!


Originally answered: November 19th, 2018.

Question:

What gives better returns, trading stocks or long-term investing?

Answer:

Both from the perspective of risk, and of reward, stock market investing isn’t better than all other available investments.

trading stocks long term investing
Trading stocks vs. other long-term investing. Copyright: Money Bear Club.

In terms of risk, investing in the stock market can feel like a bet.

Yes, investing consistently most likely will result in asset appreciation. Yes, we all know that investing in a S&P 500 index fund is an easy way to retire wealthy.

However, no investor can predict what will happen in a year or in a decade. The long-term perspective is very important. It’s necessary to remember that investors are human, and are prone to thinking irrationally.

Even the most intelligent investor doesn’t know, how he or she will react to events 10 years in the future. Or even 5 years in the future. The inherent risk associated with the economy and the performance of individual companies is compounded many times by the hasty emotions of investors.

In terms of reward, the small investors have to cope with the reality of the saying “you have to be rich to get rich”. The rising popularity of investing into penny stocks shows the harsh reality of poorer investors. A 10% yearly appreciation won’t make anyone rich if the total worth of an investment is $1,000.

Large investors have the tools to directly invest into a forest in the Amazon or a German factory. The rewards associated with these investments are far higher than those gained from the stock market.

Stock market investing has its advantages. For those who can’t afford to invest in more expensive venues, such as real estate, stock market still provides an opportunity to grow their wealth.

Yet, it can be said that the real winners of stock market trading aren’t those who trade. It’s those who provide services related to the stock market.

Without the stock market, everything from finance news sites to brokerages would cease to exist. Hence, stock market investing may be good for the whole economy, but not necessarily for the individual investor.

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