W: How can individuals determine if they should be more geared towards a trading or investing approach? What are they key factors they need to consider?
AR: The number of investors in the market is significantly higher than the number of traders. This is due to the skills required to be a trader. Traders need a lot more discipline to be successful, and knowing yourself, and your ability to remain disciplined is a key determinant of potential success.
As an individual who starts out trading, the most important factor is to determine their own risk-tolerance and start out with small positioning that is not going to significantly impact their wealth, while learning how to trade. A knowledge of the market is a pre-requisite, but no guarantee of success. What we tend to find, on the flip side, is a lot of successful and experienced traders tend to probably trade too small.
One can be successful in either (Warren Buffet vs. Paul Tudor Jones) – the most important thing is to stick to one’s temperament. If you fall asleep at the thought of reading an annual report or research piece, then perhaps being an investor is not the mould for you.
If you are more inclined towards a fast-paced environment, with daily to weekly close monitoring of market movements and events, then perhaps you are a trader.
Even perhaps more importantly, if you understand the importance of wealth creation, yet are not particularly interested in either being an investor or trader yourself, then find someone with a track record and approach that resonates with you. In other words, investors should not allocate their monies to traders, nor vice versa – as you’ll most likely withdraw your money at the worst possible time – this has been a big driver in Saxo developing the Saxo Select offering.
W: What are the main advantages and disadvantages of the trading approach?
AR: The main advantages of trading are that you can generate an income and a significantly higher return on your assets. Be prepared, as the downside is more acute, and the likelihood of losing the money invested is also significantly higher. This is why discipline is the number one determinant of success in the world of trading.
Also, generally speaking, trading is more stressful than investing, and this is because the leverage tends to be significantly higher in trading. So while an unlevered investor can take a recession pullback of say -20% to -40% in stocks, a levered trader could never take such a move. Yet leverage cuts both ways, investors will rarely have years where they make +100% returns on their capital, traders can do that in a month or even a week through successful use of leverage.
W: What are the main advantages and disadvantages of the investing approach?
AR: For investors, the main aim is income generation and wealth preservation on an inflation adjusted basis. The advantages of this is that there are a lot of tools, like ETFs, which an investor can use to diversify risk across geographies and asset classes at a very low cost.
The other huge advantage that investors have over traders is time – in the long-term, fundamentals and facts tend to come to fruition. In the short-term, there is a lot of noise, that can lead one to be shaken out of a position or view that later plays out. So while an unlevered investor can take a recession pullback of say -20 to -40% in stocks, a levered trader could never take such a move. Yet leverage cuts both ways, investors will rarely have years where they make +100% returns on their capital, traders can do that in a month or even a week through successful use of leverage.