The answer to "should you be trading to beat the market" is unquestionably NO! Just like the old commercial, just say NO! There are many reasons for this but let me give you a few.
If you trade regularly, you are sizing up with the big boys.
When I was a kid, every comic book had ads in the back, one of them was for Charles Atlas. Charles Atlas was a strapped together muscular guy. There always was a picture of a skinny kid at the beach getting sand kicked in his face. The kid always signed up for Charles Atlas's course on body building. Then, he goes back to the beach and kicks the bullies butt!
The point here is that, in truth, a skinny kid becoming a hero doesn't happen very often. The fantasy is bigger than the actual truth. The same goes for trading. Individuals are very unlikely to beat the big boys in their own “sandbox”. The path is littered with skeletons of those who have tried.
In Sun-Tzu's book "The Art of Warfare", he says "when you are no match for the enemy, be able to avoid him." By trading, you are squaring up when you should take a different tactic. Did the minute men line up with the Brits in the Revolutionary War? No. They hid behind trees and picked the Brits off. I have three words to say. Don't do it (including the contraction.)! Hold long term.
Second, according to the value investors' doctrinaire, the market is not efficient in the short term. This means the market could be overvalued or undervalued in the short term. But, in the long term, the market eventually gets it right.
There are lots of highly motivated and technologically armed traders who are trying to beat the market in the near term. It would be wise to avoid their points of strength. Quite frankly, many of them even get crushed by the market as well.
Companies’ fortunes are not made in a minute, an hour, a day, a month or a year. Just like an Olympic athlete, years of training goes into their success. Trading in the short term tries to hold a security with the hope that the short term will prove successful. But, it fails to consider that the success of companies cannot be truly measured with such short time frames. No business of any size can change their operations on a "turn of the dime". Be realistic. There are no genies in a bottle (Wake up, day dreaming is not allowed!).
Third, suppose you did beat the market in the short term. That's great, but Uncle Sam thanks you and takes a nice big tax bite out of success. You see, short term capital gains achieved in one year are taxed at ordinary tax rates. Anything held under 366 days is subject to ordinary tax rates.
If you make 100K in 2018, you're marginal tax rate for ordinary income is 28%. On the other hand, anything held 366 days or more is subject to capital gains taxes. The capital gains tax is only 15% for 100K. Now that's 46% less (1- (15/28)) tax than ordinary rates. Uncle Sam is happy to take your successful (Assuming you were lucky enough to be successful!) bounty to support the greater good of our country. Thank you very much. For each trading dollar you earned, you only have $.72 to reinvest versus $.85 with LT capital gains.
Suppose you always keep your investments just over a year, you would pay the lower LT capital gains tax. But...., it is even better if you kept your investments 2, 3, or more years. You see instead of paying tax each year and only having $.85 to re-invest, you don't sell and use what would have been Uncle Sam's cut (15%) to earn more money. Thank you Uncle Sam. Don’t forget to be courteous to your nice old uncle!
The less often you have to pay your uncle, the better opportunity to let compounding take root. Now that assumes you have selected fundamentally sound securities at reasonable prices that have long term prospects.
Long term holding is one of the keys to success in owning real estate properties. Real estate investors usually hold on to their properties for a very long time. That allows the investment value to grow and grow and grow (sort of compounding). They don't pay until they finally sell. This could be 5, 10 or more years. In essence, paying LT capital gains ONLY ONCE and using the value that would have been paid in tax, supercharges their gains.
Should you trade to beat the market? That depends on who you want to benefit from your activities. Your doctor (Visit them for your high stress, high blood pressure.), the big boy traders (They can eat you for breakfast.), Uncle Sam (He is always happy to take your money.), or yourself (Wasn’t that the reason in the first place!)?
Personally, I would rather not just give it away, but that is my choice. You have to determine who you want to be your benefactors!
