The Truth About Trading

By Craig Verdi, CFP®

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”

-Peter Lynch

It seems you can’t turn on the television without hearing a commercial inviting you to join an online trading system. Or you hear, “trading on your terms” as if you have any terms. What does that even mean? What it means is that they want you to hear that if you use their trading system you will make money because you are smart. And you may be very smart. But it’s not a question of intelligence. Some very intelligent people believe things that aren’t true. So, if you believe you can make money trading, I would take a bet that your belief is not true.

Why would I say that? Start out by going to Google and typing in “Successful mutual funds with high turnover rates” The turnover rate on the fund is an indicator as to how many trades the manager makes. If the turnover rate is 0% they held all the same stocks for the year. If the turnover rate is 50 they traded half the stocks, etc. Some funds are over 200%. In other words they are making two trades for every stock in the portfolio each year! A better Google search may be “Mutual funds with highest turnover rates” then check their success.

Look for returns that are audited and are registered securities that can’t make outlandish claims about returns. Anecdotal stories of big returns should not be a reason to invest. There are time tested strategies that work.

When you trade, brokerage firms make money. When you don’t trade they make nothing and eventually charge you an “inactivity fee.” As if inactivity needs to be punished! You should be rewarded for patience. Patience is the hardest and most important investing muscle you can build. But nobody will pay you to do it. A good advisor should spend the majority of their time reminding you of that.