Advantages and Disadvantages of Investing - dummies

Advantages and Disadvantages of Investing

By Barry Burns

Investing is defined as holding a position more than a year. Here is a quick overview of the pros and cons of this long-term strategy. Remember investing isn’t actually trading (trading is defined as a short-term activity).

Advantages of investing

The investing time frame is the most popular. Because it’s less active, the term trading is not used for investing. Following are some of the advantages of investing, particularly compared to trading:

  • Investing is the least “active” approach to participating in the markets. It can be good for those who have an interest in the markets but don’t have enough interest in it to make it a part of their daily or weekly schedule.

  • Some people have extreme difficulty doing short-term trading. Some, in fact, believe it’s impossible to determine short-term moves with consistent accuracy. For such people, investing may be a good choice.

  • Holding a position for more than a year potentially allows you to tap into the long-term capital gains tax, which is generally a lower tax rate than short-term capital gains tax.

  • This is not meant to be tax advice. Please consult a competent and qualified tax professional for details about taxes as they apply to the time you’re reading this and to your individual situation.

Disadvantages of investing

Investing also has some disadvantages that should be considered and weighed against the advantages. Ultimately, it’s up to you to decide whether the advantages outweigh the disadvantages for you and your lifestyle. Remember also that you don’t need to be an investor to the exclusion of being a trader.

Here are some of the disadvantages of investing over against trading:

  • Of the three time horizons, investing can be the slowest way to make money, assuming that you could be an excellent swing trader or day trader.

  • Because investing reuses the same capital very infrequently, the annual returns are generally not as good as a successful professional trader.

    Earning an average 10 percent return annually may be considered acceptable for an investor. However, some day traders have made 10 percent returns in a week! That’s certainly not meant to be an income claim, nor is that normal, but, yes, it does happen.

  • Investors notoriously have a very difficult time outperforming the market — making investing decisions that result in a better return than if you simply invested that same money into an equity index fund, such as the S&P 500, and didn’t touch it. Even many professional fund managers aren’t able to do that for their clients after costs.