The short version
- An active stock trading strategy focuses on earning a profit from short-term stock price changes.
- I use a “boring” approach to investing and hold investments for the long term.
- While technical analysis can be useful, I focus more on fundamentals in my long-term investment strategy.
What is active stock trading?
Active stock trading involves buying and selling single stocks to profit from daily fluctuations. Active traders often use fancy charting apps and tools to predict stock prices in the coming hours, days, and weeks.
Most active traders closely follow the news, earnings releases, economic data, and stock price trends to decide on the right moment to buy or sell a stock. It can be a thrilling, fast-paced experience.
But that’s not my goal for my money. My biggest priority is growing my wealth in the long term.
I don’t care if it’s exciting or boring. I only care about making more money. And for my money, the best strategy is passive, long-term investing.
Read more: Buy and hold vs. active trading
Fundamental vs. technical analysis
The goal of investing is usually to “buy low and sell high.” That means buying a stock when you expect the price to go up. Active investors spend a lot of time with technical analysis tools, while long-term investors like me prefer fundamental analysis.
Most traders use a set of metrics to inform an active investing strategy that includes technical analysis. Technical analysis uses charts and recent stock prices to predict future stock prices. Active traders look at these charts to find patterns. While some traders are successful with this method, it’s not very common.
Fundamental analysis involves looking at a company's financial results to estimate the company’s value and intrinsic stock price. The investor will buy if the current stock price is lower than the intrinsic value. The investor will pass if the price per share is higher than the estimated value.
Perhaps the most famous investor to rely on fundamentals was Warren Buffett — the “Oracle of Omaha” and longtime CEO of Berkshire Hathaway. He is considered one of the most successful investors ever. Much of his investment thesis comes from his old college professor Benjamin Graham, who wrote the book The Intelligent Investor.
Read more: Technical analysis vs. Fundamental analysis
Full-time investment pros usually can’t beat the market
Most people like to think they’re smarter than average. But even the most intelligent people in the world who work full-time on Wall Street can’t beat the markets regularly. People who work 16+ hour days to beat the market usually can’t do it. And average Joes like you and me only have a limited number of hours to manage our money.
According to a report from S&P Global, about 80% of domestic equity funds underperformed compared to the S&P Composite 1500 index in 2021. You read that right — 80% of professionally managed investment funds can’t beat the market. Large-cap funds underperform the S&P 500. Mid-cap and small-cap funds underperform the mid and small-cap indices.
Active investing doesn't seem as exciting after you realize only 20% of the professionals beat the market. Eighty percent of people who spend 60+ hour workweeks on Wall Street can’t beat the market consistently. So I don’t have the hubris to think I’ll do much better. I prefer long-term stock investments and index funds for the bulk of my portfolio, much like my investment hero Warren Buffett.
Read more: How to invest in index funds: Do it right
Most of my money is in boring and long-term investments
I follow a roughly 80/15/5 allocation for my investments. I do this to balance risk and keep my investments aligned with my long-term financial goals.
- 80% is set aside for low-cost index funds for retirement.
- 15% is in single stocks. These are long-term holdings that I’m not looking to sell for a decade or more unless there’s a significant change in company fundamentals.
- 5% is for riskier, speculative investments, like cryptocurrencies and artwork.
Everyone’s finances look different. Your approach to investing won't be the same as your sibling, best friend, neighbor, or coworker. Everyone has unique financial goals and needs, so there’s no one-size-fits-all solution. It’s up to you, and perhaps a trusted financial advisor or robo-advising platform, to decide on your best strategy.
The bottom line: Slow and steady wins the race
Since I have little kids at home, I read a lot of stories. When I'm investing, one that comes to mind is the “Tortoise and the Hare.” While the hare is faster out of the gate, the tortoise ultimately wins. Both that story and my personal investing approach follow the adage, “Slow and steady wins the race.”
Whatever happens in the economy and stock market, I continue to invest a portion of my monthly income. So far, it’s worked out great. And I truly believe that, over the long term, my slow and steady approach to saving for retirement will be a winning strategy.