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I find active trading much more fun than just putting money on an index and watching it slowly move. Hence I am so happy we are back in a stock picker’s market. It’s thrilling to watch Apple make a big move up or Pepsi make a sharp move lower (as long as you’re on the right side of the trade!).
Yes, I am aware that investing long-term in an index creates wealth over time. Put your money down on the SPY, QQQ, or IWM, leave it there, and watch it grow.
But if you want to create more wealth in a shorter period of time, active trading is for you. Active traders have an entire market of stocks to choose from. Passive traders (who invest in an index) have to rely on all the names in the index to do well.
It is true that active traders have more work on their plate, but that work has its advantages. At the top of the list:
The active trader can beat the market if the conditions are right and the names they hold bounce higher.
I am an active trader with my short-term and long-term accounts.
No, I am not always trading, and in fact my long-term accounts have stocks that I bought years ago. I don’t sell them, I simply add to my holdings. But that portfolio is not an index of 500 stocks. Rather, they are hand-picked to include the highest quality companies in the best sectors. Some are speculative companies to help add a little more juice (risk) to the portfolio. This technique of stock selection has helped me to achieve better returns than a comparable index.
So, why is this important? If you have some skill in selecting stocks, then use that edge to beat the market returns. That edge can help you create excess returns for your portfolio, and with the effect of compounding returns, you could find yourself outperforming market indices every year.
Related: Market Psychology, FOMO, and You