WHAT is trading? Trading involves making frequent profits by the purchasing and selling of shares or other financial assets over short periods of time. Traders take a short-term view in making profits.

In contrast, investors pursue greater profits over the long term by buying and holding financial assets for an extended time.

There are retirees who decide to participate in trading because they believe they have more time to study the market and have become interested in earning short-term profits. It’s, however, difficult to beat or time the market. A sudden downturn in the market can be crippling to an investor’s wealth or funds while in retirement, as the investor can miscalculate how soon to get out of the market before a decline. It’s important for investors in retirement to understand the difference between trading and investing and seek the services of a professional retirement planner or adviser to offer investment guidance, as investors can be carried away by their emotions when markets peak. The stock market consists of peaks and troughs. Traders seek to capitalise on market peaks by buying stocks when prices are low and selling when prices are high. But often when there is a sudden downturn in the stock market traders in retirement tend to retreat to low-risk instruments, which can lead to real loss on their investments. Investors with a long-term view, will remain patient during the down times in the market by absorbing short term losses. They understand that the greater the risk, the greater the returns and they are willing to reap the rewards when the market rebounds.

Trading can be highly stressful for a retiree. It can be akin to a full-time job. There are retirees who believe that being in retirement would give them enough time to trade daily, only to realise that trading is not as easy as previously thought, resulting in many giving up their trading pastime. Discussions with some pre-retirees reveal that they are no longer interested in trading as they have got weary in watching the market, and would rather use the services of financial experts to invest funds on their behalf over the long term. These investors are interested in buying assets that are expected to increase in value over the long term, thereby realising significant profits due to compound interest. Investors are concerned with the average rate of return on their investment and the projected rate of return. The average rate of return is significant as it takes into consideration the years of growth, which reduce the impact of any loss that occurred during the years of investing.

Trading can be exciting but understand that it is the formula for short-term wins. It has attendants’costs and is riskier that investing long term. Always separate short-term goals from long-term goals and invest accordingly. Investing maybe boring but it is the surest way to create wealth. It allows investors to create portfolios of diversified assets such as stocks, bonds and real estate. Compound interest and time help investors to create wealth. Investing long term will always outperform short-term gains earned by trading. Choose wisely as the objective of both is to make profits. But if your objective is wealth creation then most of your funds should be invested for the long term. Trading a smaller percentage of available resources is a prudent option. Be aware that the shorter the time horizon the greater is the risk on your investment. Long-term investment is not just about investing for years but for decades.

Trading is speculative and is high risk. It also gives high returns but there is a greater risk of loss than investing long term. When investing long term, it’s wise to invest in managed pooled funds such as mutual funds, exchange traded funds (EFT), pension funds, unit trusts. Funds are invested in long-term growth stocks. Your investment is not dependent on the performance of a single company’s performance but a group of companies. Investing passively will yield higher return in the long term than actively trading. The cost of trading is also higher when compared to investing. The current global crisis requires investors who are critical thinkers, being able to see beyond the present trends, and plan ahead, seizing opportunities from present adversities.

Grace G McLean is Financial Advisor at BPM Financial Limited. Contact her gmclean@bpmfinancial. and visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com