Personal finance

Why Day Trading Isn't the Best Strategy for First-Time Investors, According to a Financial Planner

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This year, the stock market experienced the fastest market declines on record during the onset of the Covid-19 pandemic in the U.S. before bouncing back in a rocket-paced rebound. On Tuesday, the Dow Jones Industrial Average even surpassed 30,000 for the first time.

For some investors, those extreme highs and lows were highly profitable, which can be alluring to those looking to cash in on all the market action. In fact, 51% of investors under 34 report they are trading stocks more frequently since the pandemic started, according to an E-Trade survey of over 800 experienced investors in August.

But while you might see a lot of people share investing success stories after opening up accounts on trading apps like Robinhood or at brokerages like E-Trade, first-time investors should tread carefully, says Eric Roberge, a certified financial planner and founder of Boston-based wealth management firm Beyond Your Hammock.

"When it comes to investing, a lot of people are familiar with 401(k) investing," Roberge says. But not as many people are familiar with opening a brokerage account and managing daily trades in a way that ensures long-term gains. Recent academic studies have found that consumers have a hard time making a living by day-trading and many experience negative returns more often than not

Instead of chasing short-term gains by buying and selling stocks, here's how Roberge recommends approaching investing if you're a beginner. 

Ask yourself why you're doing it

When it comes to making investments, whether it's through a financial advisor, an automated investment platform or even an app that lets you select your own investments, always start by asking yourself why you're doing it, Roberge says. What are you investing for? Is it for long-term financial security? Or is it "play money" you can use to chase the excitement of day trading? 

How you answer those questions will determine which strategy is right for you. If you're looking for some type of financial security, like most people, then attempting to buy and sell stocks at the right time is probably not the best solution. 

"Right now, people are investing because they think the stock market dropped significantly, which it did in March," Roberge says. While market ramped back up pretty quickly — so much so that many investors have hit some wins — any gains are likely short-term. Most financial professionals, including Roberge, caution against trying to time the market.

Plus, those quick wins can give you a false sense of confidence. You may think you've made a good or bad investment based on your knowledge, but it could have been by chance. "I really want people to check themselves to make sure that they understand that a lot of it's just luck when it comes to short-term gains or losses," Roberge says. 

Regardless of how you're investing, Roberge recommends always thinking long-term. "Understand that markets will go up, and they'll go down," he says.

Invest using a balanced, diversified portfolio

Ultimately, you want to make sure that you have a good mix of investments in a diversified portfolio. At the most basic level, this means you don't want all your money invested in the same place. Instead, you want to set up your investments in a way that when one sector of the market is dipping, you are also invested somewhere else that is performing well.

Just having stocks and bonds is not enough to keep your risk low though. You also need to diversify your investments within these asset classes.

To start investing beyond just a 401(k) or other retirement account, you can sign up for a taxable brokerage account with a brokerage such as Fidelity or Charles Schwab. Then, instead of picking individual stocks, Roberge recommends considering an an asset allocation fund, like a balanced fund or a target-date fund.

These types of investments typically provide broad diversification across asset classes (U.S. stocks, international stocks, emerging market stocks, global bonds, real estate, etc.) and the right balance between stocks and bonds, Roberge says.

With this strategy, there's no need to constantly buy and sell stocks as the market changes. But if your goals change, then you may need to adjust accordingly. If it feels overwhelming to try and pick a fund yourself, you can always work with a professional or invest through so-called robo-advisors, which typically use algorithms to build and manage a portfolio for you.

"Stick with your plan and don't change based on short-term economic environments or different pieces of news that you might hear, because those things are probably going to be a distraction," Roberge says.

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