Long-Term Investors Need to Think Short-Term
Investors often aren’t concerned with short-term fluctuations or daily price action. But when it comes time to buy and sell those stocks, smart investors turn into traders, looking to enter and exit at the best price.
By Vikram Rangala
Wednesday, May 4, 2016 - 00:00
Though I’m a short-term trader and work for an exchange whose longest-term product is a weekly binary option, I sometimes get asked for advice on friends’ stock portfolios. I usually escape by saying I’m not “an investor,” but the times they really need my advice are when they’re in a drawdown or thinking about getting out. At such times, their brokers are of little help.
“Should I ride out this drawdown?” is usually a simple decision. I look at a chart of the stock as well as the overall trend of the S&P 500. I ignore the news. It’s the typical way a mostly-technical trader like me works, but it’s different from what the average investor is used to hearing from the media or her broker.
The big recent “drawdown” was in 2008-2009. I remember friends whose brokers sent them quarterly reports, saying, “Don’t open this until I tell you it’s okay.” They actually said that.
But let’s not rant about how brokers are salesmen and not fiduciaries. The worst part of a drawdown is hearing that it might be the beginning of a bear market. In Q1 of this year, when the S&P lost nearly 15% of its value in a couple months, some friends asked me if they should just bail on the stocks they’d been holding for years.
Since the question was “Should I sell?” I asked a simple question: would I short the stock here? If the answer was yes, I told my friends to sell. It was a lot like the question behind a Nadex binary option.
If I wasn’t eager to short (though not that hyped about buying, either) I told them to hold on. Why hold on when the market had lost 14% of its value?
By late February, the S&P 500 looked like it had double-bottomed. That was the first reason. The second was the overall strength of the US economy. Whatever the election-year rhetoric, the fact remains that we are in the longest period of continuous job creation in US history: 65 months. The US economy is strong.
I had other reasons not to be bearish. While the market was in a period of net selling, there were numerous reports that some private equity firms and funds were sitting on huge piles of cash, waiting for cheap prices to slowly start buying. Then there’s the continuing availability of cheap money from the Fed.
Those funds did start buying, which is part of how the market erased its Q1 losses. (And they still have record amounts of cash to spend.) But we didn’t care about why. We just looked at the charts. By late March, my friends’ stocks had recovered. I taught them how to set limit orders to sell near daily or weekly highs. Some were surprised they could name their price. “It’s like eBay!” said one.
In short, I got those investors to think like traders. Right down to placing limit orders at what we expected to be intraday highs. My friends enjoyed the process. I should have told them that if they wanted to do it more than once every few years, they could open a Nadex account for $100 or more and trade the short term price movements that are noise and nuisance for investors, but bread and butter for traders.
Whether you trade an obviously short-term instrument like a Nadex binary option or you are looking to rebalance your long-term portfolio or something in between, remember that every buy or sell order happens in a moment and you have a choice about when and where you buy and sell. Market orders have their place, as do limit and stop orders. In fact, Nadex has a unique Market Order with Protection (MOP) that protects against slippage. Remember you have a choice. It’s a shame to lose some of your long-term profits because of bad short-term decisions.
Photo: "'Incomplete' Bridge" (CC BY-NC-ND 2.0) by ken.scarboro on Flickr
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