Successful active traders are masters of the short-to-intermediate term, employing a combination of discipline, adjustment and repetition to maximize their profits.
But for the vast majority of traders, the biggest earnings potential is in their long-term investment portfolios, not in their trading accounts. No matter how successful you are at trading in the near term, you will be hard-pressed to beat the returns in your investment portfolios, says Kevin Horner, senior manager of Trading Services Education at Charles Schwab. Because of this, Kevin argues that no trader should have less than 80 percent of their total assets in their longer-term savings.
When it comes to managing that money, he says traders need to approach their long-term investments as intentionally and as methodically as they do their short-term holdings. He believes every trader should have a financial plan to help manage their savings.
Research consistently shows that planning generates wide-ranging benefits. A recent Schwab survey of 1,000 Americans, for instance, found that those who were following a financial plan rated the highest in accumulating wealth, effectively managing debt and achieving their savings goals. This, in turn, makes it easier to stomach volatility in your trading results.
"At the end of the day, your financial plan helps build your safety net," Kevin says. "My long-term portfolio is what gives me the comfort to trade."
There are key differences when managing investments for short-term profit and long-term gain, and some strategies for the latter are the polar opposite of what you would do for the former. Kevin says five strategies in particular can help differentiate between them.
#1 - Shift your targets
Before you enter a trade, you have a clear objective in your mind of what you want to accomplish. This is usually the profit you hope to make on the trade, and it helps identify the price the stock needs to reach for that to happen.
But, in a financial plan, you need to shift your thinking from price targets to savings targets. Identify the reasons why you're saving and investing by setting out specific goals. In addition to retirement, you might want to put your kids through college, purchase a second home, or start a business.
Once you know your goals and prioritize them, it makes it that much easier to assess how much it will take to achieve each one. It also makes it simpler to set your asset allocations for each goal, with shorter-term objectives demanding more conservative investments and longer-term ones enabling you to be more aggressive.
#2 - Keep your accounts separate
In trading, the key is to limit your losses and let your winners run. But many make the mistake of letting their trading losses turn into even bigger ones rather than accept defeat. "You see it all the time," Kevin says. "The trader mentally moves a losing position in their trading portfolio over to their investment portfolio so it has time to recover."
Kevin says it's important for any trader to delineate clear lines between their trading and investing activities. When initiating any new position, decide which portfolio it's going to reside in—and leave it there. When you're going through a tough slump, never take money from your investment portfolio to replenish your trading account. If any money is moving between the two portfolios, it should be taking some of the profits from your trading account and adding them to your long-term portfolio to help achieve your savings goals.
#3 - Don't micromanage
While you have to keep a watchful eye on your trading account as part of being a successful trader, it usually pays to do the exact opposite with your long-term investments. "Staying invested is the most important component of long-term investing success," Kevin says. "That means sitting on your hands sometimes, especially when volatility spikes."
Instead of trying to time the market with your long-term portfolio, start a routine of investing at regular intervals. The Schwab Center for Financial Research recently concluded that an investor with perfect timing in adding new money to new positions (buying at the market low each year) would have been only marginally more successful over a 20-year span than one who invested in stocks the first day of each year or one who invested in stocks at the market top every year.