Which is better in a volatile market; long-term investing, day trading, or saving?
Given the state of the economy, and the potential collapse of the US dollar, which strategy is best? Although the history of the markets has been always an uptrend, I don't feel confident this will continue to be the case for eternity.
You’re wise to question markets in the context of supposed historical norms, since we have not experienced market dynamics like this in the history of money. It’s clear we’re in unprecedented territory when the Dow drops more than 300 points because of a possible Federal Reserve member speech. Investors can no longer rely on economic trends or company fundamentals to better understand market movements as stocks instead now move at the beat of central banking policy. You’d think weak economic data might make equity investors pause. Instead, we’ve entered some sort of parallel universe where bad news is good news. When the August jobs report came in well below expectations, stocks rose, since the data meant the Fed might maintain its accommodative low interest rates.
Here’s the real problem: To truly avoid the market uncertainty you’ve addressed, an investor would historically put his or her money in cash. Today, that money would earn next to nothing, essentially banking a loss if you consider that inflation is running near 1%. Central banks accomplished their goal: To steer investors into equity markets and ensure they never left. Despite economic stagnancy, equity benchmarks are near record highs. Trying to determine whether or not markets will break from very long-term trends is a fool’s errand. Making that bet might only result in missing out on a long-term (albeit moderate) growth trend across your time horizon. For all we know, central bank policy will keep the current bull market afloat for years.
We don’t recommend day trading as an alternative. Fear compels investors to sell out of positions, locking in significant losses and missing positive day-to-day reversals. When the market heads higher, greed forces those same investors to buy back into markets too late. They miss the upward correction, only to lock a loss at the bottom and pay a premium at the top. Even investment manager “gurus” that attempt to time the market have continuously proven the failures of such practices. Frankly, unless you have serious trading experience, you might as well bring your money to Vegas and put it on red (Read: Normalization: How A Rational Market Downturn Yields Irrational Fear.)
You mentioned savings. As we said above, your money in the bank can’t currently keep up with inflation. However, we believe maintaining cash reserves is essential, particularly to lower your overall exposure to risk assets and to ensure you have the liquidity necessary to endure any market downturns. Considering the myriad issues you acknowledge in your question, we think saving in tandem with a well-designed, well-diversified, long-term portfolio still best sets up investors for financial success. Ultimately, you should shift your focus to your life rather than these financial stresses. The percentage of growth in your portfolio should not define your happiness. You should consider finding an experienced financial advisor that can help guide you toward aligning your life and wealth.
In my opinion, there is no such thing as long term volatility. History has shown us that investments go up and down daily, weekly, monthly, and even yearly. Over long periods of time, (I'm talking a 25 to 30 year retirement) stocks have done well.
If one could day trade stocks effectively, then volatility is your friend.
A successful financial life doesn't come down to an "either or" (generally speaking unless one has millions and low expenses, a savings account might do the trick). One needs to have a good amount in savings to handle emergencies and shorter term needs as well as a diversified portfolio of investments for a lifestyle sustaining income throughout retirement.