David Fabian: As an investment adviser, I run across all different kinds of stock market participants. Some are investors, some are traders, and some are trying to do both. While the majority of participants have clearly defined their role through experience or training, often times the cross over group gets themselves in trouble by trying to do too much with too little discipline.
While there is certainly room in the middle for investors to take small shots in the dark with speculative trading positions, it’s important to remember that risk tolerance and time horizon can hinder you from a successful outcome.
I consider an investor to be a participant in the market with an intermediate to long-term time horizon and a moderate level of risk tolerance. They are comfortable with modest swings in their portfolio given an appropriate mix of assets that works in harmony to achieve their goals. They don’t swing for the fences, but instead take a balanced approach given their desire for consistent growth or income.
By contrast, a trader is more engaged in the ins and outs of their particular niche. They may day trade, swing trade, or otherwise attempt to time the market’s machinations on a short-term basis to achieve profitable results. This often involves large cash positions, patience, discipline, and a healthy understanding of risk dynamics. They can jump in or out of the market at a moment’s notice given their specific triggers or analysis.
Knowing which group you fall into is a healthy exercise in personal introspection. This is particularly important given the recent change in market tenor that has increased calls by experts or friends for significant changes to your portfolio. ETFs that move inverse to the market, use leverage, or follow volatility futures are now back in vogue.
The iPath S&P 500 Short-Term VIX Futures ETN (NYSEARCA:VXX) is a perfect example of a fund designed to capitalize on a return of fear in the marketplace. While trading its recent swings appears enticing, it should only be an exercise for aggressive traders looking to capitalize on short-term opportunities.
Often time’s investors that try to perform like traders fall into the trap of uncertainty when a position moves against them. That is because they aren’t used to setting tight stop losses or have purchased a fast-moving stock or ETF that they would normally have avoided.