Image by: 401(K)2012
By Michael Sterling
Sometimes, investors can be the most stubborn people on the planet. Many of them feel like they know it all, and a likely result is heavy trading. In some cases, they might see great returns, but sadly the majority find out the hard way that they didn’t know as much as they thought they did. You don’t need to be a heavy trader to see profit, and here’s how:
#1) Make Sure Your Diversified
Whenever all your eggs aren’t in one basket, it always leads to less micromanagement. All of your net worth isn’t tied up in the next trade, and even though you might make around the same amount of trades as before, they’ll be spread over more companies which will lower the turnover of each position.
A likely result is being able to cut down on some catastrophic pitfalls, i.e. capital gains holding periods, dividends and stock splits, and even less risk since not everything is riding on just a few positions. Using an actively managed mutual fund might actually ease your anxiety about the whole thing, that is, if you’re willing to give someone else control.
Finding funds that focus on high-turnover strategies and separately managed accounts might help. Not only will you be less nervous since you know someone is actively working the market for you, but they will also have more expertise and lower costs than if you do it yourself.
#2) Stop Overtrading!
Many investors feel the need to constantly follow the ups and downs of their favorite stock every day, leaving them feeling neurotic and overloaded with information that they fail to do the critical research that’s required. The likely result is making investment decisions based on adrenaline and impulse.
More so than investing your money, you need to invest your time. By doing this you’re more capable of outperforming even the heaviest of traders. Often times, traders make the mistake of missing regular dividends and unexpected stock splits. This can be bad, which is why you need to take time to do critical research.
Studies from Thornburg Investment Management have estimated that dividends account for as much as half of the overall long-term growth of major large-cap indices, like the S&P 500 and the Dow Jones Industrial Average. So research wisely.
#3) Always Consider The Bid-Ask Spread
The bid-ask spread, i.e. the difference between the level at which its buyer and seller transact their share of stock, is probably one of the biggest (and most important) things most investors fail to consider properly. If done improperly, it can ring you dry and send you way down the market.
Even though Wall Street’s largest stocks have a narrow spread, it can still amount to 1% per trade – but don’t let this deceive you. It can still easily cost a heavy trader as much as 2% of his portfolio’s value in just a year. This is why you need to spread your portfolio out as much as you can. The more companies you have, the more you’re likely to overlook the spread.
#4) More Trading = More Taxes
Here’s a bit of info. The U.S. government taxes your gains on all the assets you’ve held for less than year at ordinary income tax rates. Meaning, at 2013 federal tax rates, 39.6% of a heavy trader’s gains might go to his taxes, as opposed to a buy-and-hold investor whose rates make out at 20%.
The bottom line is the less you trade, the less taxes will go to the government. That’s definitely something to think about, especially if you tend to gain a lot through heavy trading. Just imagine how much money you can save if you hold your assets and watch them grow versus trading them like a madman.