Long-term Investing Vs Stock Market Trading.

Just in case you were wondering, yes I am once again using Spanish because Google Translate has made me dangerous. What does that beautiful Spanish sentence above mean? Of course it means Sexy Finance Notes. You are welcome. Notas de finanzas Sexys. Please say it three times in an Antonio Banderas accent, preferably while staring confidently at your brokerage account and pretending you totally understand what the Federal Reserve is doing.

In this series, the Notas de finanzas sexys series, we discuss financial topics that are not always super exciting at first glance, but that can massively change the direction of your financial life once you actually understand them.

And today we are going to talk about one of the most misunderstood ideas in all of personal finance:

The difference between long-term investing and stock market trading.

Because let me tell you, these two things are not the same.

They are related in the same way that jogging through your neighborhood and being chased through the woods by a caffeinated raccoon are both technically “cardio.”

Yes, they both involve movement.

No, they are not the same experience.

Long-term investing is generally calm, boring, consistent, and mathematically beautiful.

Stock market trading is often exciting, stressful, expensive, addictive, and occasionally makes people talk about candlestick patterns like they have discovered ancient Egyptian treasure maps.

And if you are trying to reach financial freedom, retire early, become work optional, or just not be 74 years old eating gas station taquitos because you YOLO’d your 401(k) into a meme stock, this distinction matters.

A lot.

What is long-term investing?

Long-term investing is when you buy quality assets, usually diversified assets, and hold them for a long period of time.

That could be index funds, ETFs, retirement accounts, real estate, mutual funds, or even individual stocks if you know what you are doing and have the temperament of a sleeping buffalo.

The point is this:

You are not trying to guess what the market will do tomorrow.

You are not trying to figure out whether Apple will go up by 2% next Tuesday because someone on CNBC wore a red tie.

You are buying ownership in productive assets and letting time, business growth, dividends, and compounding do their thing.

It is boring.

And that is exactly why it works.

S&P Dow Jones Indices says the S&P 500 has posted an annualized price return of around 7% and an estimated 10% total return since its launch. The S&P 500 also covers about 80% of U.S. equity market cap, which is why people often use it as a simple benchmark for the U.S. stock market.

So when someone says, “the market averages around 10%,” that is usually what they are referencing: the long-term total return of a broad U.S. stock market index like the S&P 500.

Does that mean you get 10% every single year?

Absolutely not.

Some years the market goes up a lot.

Some years it goes down.

Some years it punches you in the teeth, steals your lunch money, and then somehow ends the year positive just to emotionally confuse you.

But over long periods of time, owning a diversified basket of productive companies has historically been a very powerful wealth-building machine.

What is stock market trading?

Stock market trading is different.

Trading means buying and selling frequently, usually trying to profit from short-term price movements.

This can include:

Day trading.

Swing trading.

Options trading.

Technical trading.

Momentum trading.

Buying because a stock is “about to rip.”

Selling because the chart “looks weak.”

Or doing whatever your buddy Chad said in the group chat because he once made $700 on Tesla and now refers to himself as “basically a hedge fund.”

Trading is not always dumb. Some professionals do it. Some very skilled people make money doing it.

But for the average person?

The evidence is not exactly encouraging.

What do actual studies say?

Let us start with one of the most famous studies on individual investors: “Trading Is Hazardous to Your Wealth” by Brad Barber and Terrance Odean.

These researchers studied 66,465 households with accounts at a large discount broker from 1991 to 1996.

Here is what they found:

The market returned 17.9% annually during the study period.

The average household earned 16.4% annually.

The households that traded the most earned only 11.4% annually.

Also, the average household turned over 75% of its portfolio annually, meaning people were doing a whole lot of buying and selling without actually improving their results.

Let us put that into human language:

The more people traded, the worse they did.

Not every single person, of course.

But on average, more trading meant lower returns.

Which is hilarious, except not hilarious, because it can cost people hundreds of thousands—or millions—of dollars over a lifetime.

But how much money are we actually talking about?

Great question, imaginary person I invented to keep this blog flowing.

Let us look at some math.

Let’s say you have $100,000 invested for 30 years.

If you earned 10% per year, which is roughly the long-term total return number often associated with the S&P 500, your $100,000 would grow to about:

$1,744,940

That is lovely.

That is “financial freedom is starting to smell like fresh cinnamon rolls” money.

Now let’s say you underperform by just 1.5 percentage points per year, similar to the gap between the market return of 17.9% and the average household return of 16.4% in the Barber and Odean study.

Instead of earning 10%, you earn 8.5%.

Your $100,000 grows to about:

$1,155,825

That is still good.

But compared to $1,744,940, you are short by roughly:

$589,115

BOOOOOOOOOOOOMMMMMM!!!!!!!!!!!!

That is not “oops, I bought the wrong sandwich.”

That is “I accidentally traded away a paid-off house in the Midwest” money.

Now let’s look at the most active traders in that study.

They underperformed the market by 6.5 percentage points annually: 17.9% for the market versus 11.4% for the most active traders.

To make the example simple, let’s compare earning 10% as a long-term market investor versus earning 3.5% after giving up 6.5 percentage points through overtrading, bad timing, taxes, spreads, mistakes, and general “I am smarter than the market” nonsense.

$100,000 invested for 30 years at 10% becomes:

$1,744,940

$100,000 invested for 30 years at 3.5% becomes:

$280,679

Difference:

$1,464,261

That is not a small difference.

That is “you could have had a seven-figure retirement account, but instead you had feelings about Nvidia at 9:42 a.m.” difference.

Why does trading perform so poorly for the average person?

There are a few reasons.

First, the market is insanely competitive.

You are not trading against a sleepy man in a recliner named Gary who forgot his password.

You are trading against hedge funds, institutions, algorithms, professionals, market makers, and other people who spend all day doing this.

Second, frequent trading creates more opportunities to make mistakes.

When you buy a broad index fund and hold it for 30 years, you make one big decision:

“I am going to own productive businesses for a long time.”

When you trade constantly, you make hundreds or thousands of decisions:

When do I buy?

When do I sell?

Was that dip real?

Is this breakout fake?

Why is the market down?

Should I buy puts?

Should I sell calls?

Why does my stomach hurt?

Every additional decision is another chance for your brain to do something stupid.

And unfortunately, our brains are extremely talented at doing stupid things with money.

Trading costs are not always obvious

A lot of people will say:

“But trading is free now!”

No.

No it is not.

Commissions may be zero at many brokerages, but that does not mean trading is free.

That is like saying the buffet is free because you already paid at the door. Your stomach will learn the truth later.

Trading can cost you through:

Bid-ask spreads.

Short-term taxes.

Poor execution.

Behavioral mistakes.

Time.

Stress.

Underperformance.

And, in some cases, actual transaction costs.

Meanwhile, long-term index investing can be incredibly cheap.

For example, Vanguard’s S&P 500 ETF lists an expense ratio of 0.03%, which equals about $30 per year on every $100,000 invested.

Thirty dollars.

That is less than taking a family of four to Taco Bell if everyone gets emotionally ambitious.

Now compare that with underperforming by 1.5 percentage points per year on $100,000.

That costs you:

$1,500 per year

Underperform by 6.5 percentage points, like the gap between the market and the most active traders in Barber and Odean’s study, and that costs you:

$6,500 per year

On the same $100,000.

So the boring index investor might pay around $30 per year in fund expenses.

The overtrader might effectively lose $1,500 to $6,500 per year in underperformance, and that gap can compound into hundreds of thousands or millions over time.

Scandalous information.

What about professional stock pickers?

Now you may be thinking:

“Okay, maybe regular people are bad at trading, but surely professionals beat the market all the time.”

Well, kind of.

Some do.

Most do not.

S&P Dow Jones Indices publishes something called the SPIVA Scorecard, which compares active managers to their benchmarks.

In the 2024 U.S. SPIVA report, S&P found that 65% of active large-cap U.S. equity funds underperformed the S&P 500 in 2024. It also found that over the 15-year period ending December 2024, there were no categories in which a majority of active managers outperformed.

That means even professionals have a very hard time beating simple, boring index investing over long periods.

Again, these are trained people.

They went to fancy schools.

They use complicated models.

They say things like “risk-adjusted alpha” without laughing.

And still, most of them lose to the benchmark over long periods.

So when your neighbor says he is trading small-cap biotech stocks because he “has a system,” maybe smile politely and then go home and hug your index fund.

Day trading is even harder

Now let’s talk about day trading.

Day trading is when someone buys and sells stocks within the same day, trying to profit from intraday movements.

This is the finance version of trying to catch bees with chopsticks.

A Barber-led study called “Do Day Traders Rationally Learn About Their Ability?” looked at individual day traders in Taiwan from 1992 to 2006.

The researchers found that the aggregate performance of day traders was negative, the vast majority of day traders were unprofitable, and many traders continued trading even after extensive losses.

They also found that day traders lost an average of 7 basis points before costs, and after trading costs, losses more than tripled to 23.9 basis points per day.

Per day.

Not per year.

Per day.

That is like having a tiny financial termite colony eating your account every morning while you drink coffee and tell yourself you are “learning price action.”

Now, to be fair, the study also found that some previously profitable and experienced traders could continue to perform well.

But that is exactly the point.

Some people can probably do it.

Most people cannot.

And if your financial freedom plan requires you to be in the tiny group that can successfully day trade over long periods, you better be extremely honest with yourself.

Because “I watched six YouTube videos and opened a margin account” is probably not the same as having a repeatable edge in one of the most competitive markets on planet Earth.

Long-term investing requires patience, not genius

This is one of my favorite parts about long-term investing.

You do not have to be a genius.

In fact, being too clever might hurt you.

Long-term investing is mostly about doing a few simple things consistently:

Spend less than you make.

Invest the difference.

Use low-cost diversified funds.

Avoid panic selling.

Avoid hype buying.

Let compounding work.

Repeat for decades.

That is it.

It is not emotionally easy, but it is conceptually simple.

You do not have to predict the next recession.

You do not have to know which stock will crush earnings.

You do not have to interpret Jerome Powell’s eyebrow movements.

You just need to keep buying productive assets and not blow yourself up.

And that is a beautiful thing.

Trading requires being right over and over again

Trading is much more demanding.

To trade successfully, you need to be right about:

What to buy.

When to buy.

How much to buy.

When to sell.

How to manage losses.

How to handle taxes.

How to avoid overconfidence.

How to keep emotions from grabbing the steering wheel and driving your net worth into a ditch.

That is a lot.

And the data suggests the average person does not do this well.

Again, Barber and Odean found that the average household lagged the market, and the most active traders lagged dramatically more.

So the question becomes:

Why make the game harder than it needs to be?

If you can build wealth by being boring, why choose the method that requires you to be unusually skilled, emotionally stable, tax-aware, cost-aware, and correct more often than not?

That sounds exhausting.

I already have children, bills, laundry, and random mystery noises coming from my vehicle.

I do not need my retirement plan to also require combat training.

But investing is not risk-free either

Now, we need to be honest.

Long-term investing is not magic.

The market can fall.

Sometimes it falls a lot.

Sometimes it stays down for a while.

You can absolutely lose money, especially in the short term.

Past performance does not guarantee future results.

The S&P 500’s historical return does not mean the next 30 years will look exactly like the last 30 years.

But here is the key difference:

Long-term investing is built around the idea that businesses create value over time.

Trading is built around the idea that you can repeatedly profit from shorter-term price movement.

One of those requires patience.

The other requires skill, timing, emotional control, and often a bit of luck.

I know which one I would rather rely on for financial freedom.

The boring path is secretly the sexy path

This is the part people miss.

The boring path is actually the sexy path.

You know what is sexy?

Having money invested.

Having options.

Having no consumer debt.

Having the ability to leave a bad job.

Having your investments pay for your life.

Having your time back.

You know what is not sexy?

Refreshing a stock chart 147 times in one day while sweating through your shirt because you bought call options on a company you do not understand.

Long-term investing may not give you a dopamine hit every morning.

But it gives you something better.

Freedom.

And freedom is the sexiest finance note of all.

Final thoughts

If you want to trade with a small amount of fun money, and you fully understand that it is entertainment, fine.

Some people like casinos.

Some people like fantasy football.

Some people like buying weird stocks and pretending they have a Bloomberg terminal in their basement.

More power to you.

But please do not confuse that with your actual wealth-building plan.

Your serious money—the money that is supposed to buy your freedom—should probably not be treated as play money.

The evidence is pretty clear:

Broad market investing has historically produced strong long-term returns.

Most active managers struggle to beat the market.

Average individual investors tend to underperform.

The most active traders tend to underperform even more.

And most day traders lose money.

So maybe, just maybe, the path to wealth is not being more clever.

Maybe it is being more consistent.

Maybe it is buying boring assets, keeping costs low, avoiding unnecessary taxes, and letting time do the work.

Maybe the wealth-building secret is not yelling “to the moon.”

Maybe it is quietly buying the market for 30 years while everyone else is trying to predict next Thursday.

And if that sounds boring, good.

Boring gets rich.

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Source references

1. S&P Dow Jones Indices – The 500 by the Numbers
   S&P reports the S&P 500 has had an annualized price return around 7% and an estimated 10% total return since launch. It also states that 92% of U.S. large-cap funds underperformed the S&P 500 over the 20-year period ending Dec. 31, 2024.
2. Barber & Odean – Trading Is Hazardous to Your Wealth
   This study of 66,465 households found that the market returned 17.9% annually, the average household earned 16.4%, and the most active traders earned only 11.4%.
3. S&P Dow Jones Indices – SPIVA U.S. Scorecard Year-End 2024
   S&P found that 65% of active large-cap U.S. equity funds underperformed the S&P 500 in 2024, and over the 15-year period ending December 2024, there were no categories in which a majority of active managers outperformed.
4. Barber et al. – Do Day Traders Rationally Learn About Their Ability?
   This study found that day traders’ aggregate performance was negative, the vast majority were unprofitable, and many continued despite losses. It also found average day trading losses of 7 basis points before costs and 23.9 basis points per day after costs.
5. Vanguard S&P 500 ETF expense ratio
   Vanguard lists the expense ratio for VOO, its S&P 500 ETF, at 0.03%, or about $30 per year per $100,000 invested.

Random funny nature picture, because finance needs emotional support