Confessions of an Active Investor

There are some who try to time the market, and there are others who just sit back and let market forces do all the work.  There are those that argue out performing index funds is impossible, and there are a handful that says the opposite.

I am an active investor, so you know which camp I belong.  However, I’m seriously considering moving all my investments into an series of diversified ETFs and index funds.

The Life of an Active Trader

Unlike most arguments against active investing, I absolutely believe that outperforming the market is possible.  I managed to do it and I’m still outperforming index funds.  My returns are much higher than the stock market benchmarks.

Unfortunately, it’s also stressful.

Unless you have experienced it, it’s hard to imagine how stressful it is to risk your own money in a volatile market.  When you can make or lose 10% of everything you ever accumulated in one day and any wrong move can wipe out your entire net worth, how can you not have pressure?

Active investing, to me:

  • Is Stressful and Tiring – You thought the possibility of losing your job is stressful.  How about your life savings?
  • Causes Sleepless Nights – The Chinese is going to announce the results of its stimulus plan honey.  Why don’t you go to sleep first?
  • Prevents You from Focusing on Other Aspects of Life – Family?  Wait, let me get an update of my stock prices first.
  • Can Consume Your Life – Any wrong move can wipe out a huge chunk of money you need to retire on.  Shouldn’t you be thinking about it all the time?

The Case for Worry Free Investing

While winning trades always feel good, I’m constantly paranoid.  I check my stock positions on the phone constantly and the first thing I do when I wake up is turn on CNBC.  When I golf, I don’t think about my putts.  Instead, I think about whether Wells Fargo (WFC)’s earning announcement will disappoint.

How great will it be if I can just sit back and not worry about the stock market?  Coca Cola (KO) reporting?  Don’t care.  McDonald’s on fire?  Good for them but don’t tell me.  With passive investing, you can do that.

You will never outperform the market, but you won’t be poor if your diversified portfolio of investments are well planned.  You might potentially leave money on the table, but working and stressing to get it is basically a second (or for some, third) job.

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{ 4 comments… read them below or add one }

Richard April 29, 2009 at 9:37 am

Great story… I love index funds and I can’t understand why anyone would get another job just so they can “try” to outperform.

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Henry May 4, 2009 at 6:38 am

I am just wondering if managing and actively timing etfs and lets say 5 stocks is much easier than having a portfolio of 30 to 50 stocks to actively manage.

From my experience, taking unsystematic risk is one way of beating market returns, but that hasn’t worked for me. Inspiration from Jeremy Grantham, I think it might be possible and easier in picking the winning asset classes than individual stocks in a single market. What do you think?

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Investing School May 4, 2009 at 2:29 pm

As far as I’m concerned, 30 to 50 stocks is pretty much impossible for one person. Mutual funds may have that many stocks within their portfolio but they have teams of analyst and computer models to weed out much of the hands on research that smaller traders need to do by themselves.

When most people talk about active trading, they are talking about 3-5 stocks already.

ETFs make things much easier though and is a good medium for the total passive investor vs the stock trader.

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MoneyEnergy May 4, 2009 at 9:14 am

I ditto your feelings….. I also think there’s still a meaningful difference between totally passive investing vs. doing your own research and picking stocks. I’m not a trader, but I only own one or two ETFs. I already own several individual stocks so I try not to buy ETFs that already include them. Don’t need that extra overlap. Thanks for sharing these details – makes me glad that’s not my job!:)

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