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With the rise in stocks, the appetite for risk is back! That could causing some people to abandon wise long-term investments and take up day trading.
Before we get too far into whether this is a good idea, I would say that to be successful as a day trader, you should aim to beat the market…and a lot of ink has been spilled on how active managers – and me I would include individual investors here – I can’t do that.
Well, that’s absurd. Many portfolio managers and individual investors TO DO beat the market regularly. Consider closed-end funds (CEF), for example, which return more than 7% on average, with many sporting histories of exceeding their benchmarks. This is especially true when looking at funds focused on assets other than stocks: REITs, corporate bonds, municipal bonds, preferred stocks, etc.
There’s no reason why you can’t do it too. A good place to start is the area you know best. Let’s say you’re an HVAC engineer and you’ve spent your life studying and repairing these systems. Could this expertise help you identify strong CVC companies better than a Harvard-trained investment banker?
Of course. This is why investment banks hire firms to help them acquire the expertise of people who are good in a given field. As a day trader, you may be able to cut out the middlemen (the banks that collect all this expertise) and beat the market.
Even so, the math indicates that day trading is unlikely to go your way.
Let’s say you have a million-dollar account and you invest in an index fund with an average annualized return of 8.5%, which is more or less the long-term return of the stock market, depending on the period.
For our day trading scenario, let’s be (very) generous and say that an average annualized return of 15% is on the table here.
Earnings by strategy
With these assumptions in mind, the difference in favor of day trading is $65,000, which is a lot of money, I admit.
However, let’s translate this into time. U.S. stock markets are open six and a half hours a day, five days a week, with a few days off. This equates to 1,631.5 hours of work per year, meaning you earn just under $40 per hour.
If it’s more than you currently make and you’re 100% sure you won’t make a mistake you can’t recover from, great. But even in these circumstances we must be clear that we do not have I found my financial independence here. We just found a new small business as an asset manager, and it’s a full-time job.
Of course, any day trader will tell you that they don’t only work during market hours, so in reality, $40 an hour will be lower. We can, of course, solve this problem by getting a greater return: the day trader who is sure to earn 150% per year, on average, would earn $867 per hour for his work on a million-dollar investment. dollars.
Impressive, I suppose, even though many people in finance earn more doing much less stressful things. But it’s clear that no matter how good we are at it or how much money we can make, day trading is work, and the risk is much greater when it comes to our own money. This is why at home CEF Insider The service continues to view purchasing quality CEFs, holding for the long term, and receiving their high dividends – and often paid monthly – as a much better way to go.
The alternative to passive income
With dividend yields above 7% on average, CEFs are a great way to turn long-term capital gains from stocks and other assets into an income stream.
That 7% is actually an understatement: It’s driven down by many municipal bond CEFs that yield less, but, because their earnings are tax-exempt for most Americans, they tend to be the equivalent to around 8% for median American employees (and more for high incomes).
Equity CEFs, for their part, show an average return of 8.1% over the long term, which once again indicates that CEFs have significant income streams which, on closer inspection, are in reality even more important.
This is important because it means we can get the stock market’s 8.5% annualized profits almost entirely in the form of dividends, in the case of many funds. And some do better. Take, for example, the Adams Diversified Equity Fund (ADX)A CEF Insider holding company which holds blue chips like Microsoft
MSFT
AAPL
JPM
V
The fund has achieved an annualized return of 11.9% over the past decade, while outperforming the stock market’s total return.
ADX has paid out $16.55 per share in dividends over 15 years, but it’s actually much older than that (there’s a longer history of big payouts here – more on that in a minute). Investors who purchased at that time and have collected payments since have earned a 13.5% dividend yield on their initial investment.
ADX Metrics
That’s right, that’s $135,000, still less than our hypothetical day trader who could earn $150,000 on a million invested in our previous generous example. But it’s both more than the market average And this comes in the form of dividend payments that investors had to spend exactly zero hours per year to save.
Finally, what we appreciate the most is the lower risk involved here. A serious mistake in day trading can wipe out a trader’s life savings; ADX has been a profitable company since 1854 and a profitable CEF since 1929. While hundreds of day traders are ruined every year, ADX has held strong through the ups and downs for over a century.
Michael Foster is the senior research analyst for Contrarian perspectives. For more great income ideas, click here for our latest report «Indestructible income: 5 advantageous funds with stable dividends of 10.9%.»
Disclosure: none
