When it comes to investing in stocks, there are many strategies to consider. One popular debate is whether investors should day trade or buy and hold stocks. In this article, we’ll explore both strategies and provide historical performance examples to help you make an informed decision.
Day Trading: Day trading involves buying and selling stocks within a single trading day, with the goal of profiting from short-term price movements. While day trading can be exciting and potentially profitable, it’s also a high-risk strategy that requires a significant amount of time and skill.
Historical Performance Example: Let’s take a look at an example of day trading. In 2017, a trader named Ross Cameron made over $220,000 day trading stocks. However, it’s important to note that Cameron is an experienced trader who has spent years developing his skills and strategies. Additionally, not all day traders are as successful as Cameron, and the risks of day trading can be significant.
Buy and Hold: Buy and hold investing involves purchasing stocks with the intention of holding them for the long-term, with the goal of profiting from overall market growth. This strategy is generally considered less risky than day trading, but it also requires patience and discipline.
Historical Performance Example: The S&P 500 Index is a commonly used benchmark for buy and hold investors. Since its inception in 1926, the S&P 500 has provided an average annual return of around 10%. This means that if you had invested $10,000 in the S&P 500 in 1926 and held it for 95 years, your investment would be worth around $27 million today.
Comparing Day Trading and Buy and Hold: While day trading can offer the potential for higher returns in the short-term, it also comes with significant risks and requires a significant amount of time and skill. Buy and hold investing, on the other hand, can offer lower risk and higher potential returns over the long-term, but requires patience and discipline.
It’s important to note that individual results may vary depending on a number of factors, such as the specific stocks or strategies used. Additionally, it’s worth considering diversifying your investments to minimize risk and maximize potential returns. With that said, let’s look at some examples.
Here are a few examples to compare the performance of day trading versus buy and hold strategies:
Example 1: Day Trading vs Buy and Hold – Apple Inc.
Suppose an investor decided to day trade Apple Inc. (AAPL) from January 1, 2019, to December 31, 2019. They bought and sold AAPL shares based on market trends and news, with an average of 10 trades per month. Let’s assume they invested $10,000 at the beginning of the year.
On the other hand, suppose another investor bought $10,000 worth of AAPL shares on January 1, 2019, and held onto them until December 31, 2019.
Here are the results:
- Day Trading Strategy: The investor made 91 trades in total, with 44 profitable trades and 47 unprofitable trades. The investor ended the year with a total of $10,456, resulting in a return of 4.56%.
- Buy and Hold Strategy: The investor ended the year with a total of $12,961, resulting in a return of 29.61%.
As you can see, the buy and hold strategy significantly outperformed the day trading strategy in this example.
Example 2: Day Trading vs Buy and Hold – S&P 500 Index
Suppose an investor decided to day trade the S&P 500 index from January 1, 2010, to December 31, 2019. They bought and sold index funds based on market trends and news, with an average of 10 trades per month. Let’s assume they invested $10,000 at the beginning of the decade.
On the other hand, suppose another investor bought $10,000 worth of S&P 500 index funds on January 1, 2010, and held onto them until December 31, 2019.
Here are the results:
- Day Trading Strategy: The investor made 1,092 trades in total, with 534 profitable trades and 558 unprofitable trades. The investor ended the decade with a total of $14,066, resulting in a return of 40.66%.
- Buy and Hold Strategy: The investor ended the decade with a total of $34,176, resulting in a return of 241.76%.
As you can see, the buy and hold strategy significantly outperformed the day trading strategy even over a long-term period.
Of course, these examples are based on hypothetical scenarios and past performance does not guarantee future results. It’s important to carefully consider your investment goals, risk tolerance, and investment horizon before choosing a strategy. Additionally, it’s essential to diversify your portfolio and consider factors such as fees and taxes when making investment decisions.
Ultimately, the decision between day trading and buy and hold investing will depend on your individual financial goals, risk tolerance, and level of experience. It’s important to do your research and carefully consider the potential risks and rewards of each strategy before making a decision.