Trading Vs Investing — Which Is Your Key to Financial Freedom?
Should I be day trading the stock market? Or should I rely on passive investing?
When it comes to money and investing, there is a lot of confusion about the difference between trading and investing. And which is better for you to achieve your financial goals?
Let’s look at the differences…and help you figure out which is better for you to achieve your financial goals…
(it could be both…?) 🤔
What is Trading & Investing?
Both trading and investing aim to provide you with an income by buying and selling assets.
‘Assets’ include stocks and shares, gold, bonds, foreign currencies, cryptocurrencies, etc.
The main differences occur when we look at two things:
- Time horizons
- Time input
Time Horizons
Trading — Time Horizon
Generally, trading is a short-term game, whereas investing can be considered a long-term game.
The short-term trading time horizon can mean holding a trade anywhere from a few seconds (scalping) to a few weeks (swing trading).
Short-term time horizon… for a short-term gain.
Investing — Time Horizon
Investing aims to provide you with an income over the long term.
Depending on their investing approach, many investors may buy assets and plan to never sell… (that’s long-term!)
…looking to grow income and capital through passive investing returns, either for retirement or building generational wealth.
Time Input
When considering which is best for you, you should consider how much you actually enjoy finance and how much time you have available…
Would you happily spend a good portion of your week on the charts, researching, backtesting, buying, selling, etc., or are you more hands-off, ‘set and forget’?
Investing — Time Input
A typical investment portfolio may only take about an hour a year to manage…
Which is generally the time it takes to rebalance your portfolio once or twice a year.
Trading — Time Input
This can vary from an active day trader, who could be on the charts 8+ hours a day, including journaling, backtesting, etc.
To a swing trader who may only require a few hours a week…
As you can see, the time input required for trading and investing is a significant factor.
Trading & Investing Returns
Trading Returns
Many online courses and Insta-gurus will advertise and flash high returns to lure you into their program…
It is possible to generate high returns trading… but it’s not the norm.
Whether you’re trading stocks, forex, crypto, etc., it’s fair to say that with enough education, dedication, and time commitment, averaging 4%-10% per month is achievable for most. Still, I wouldn’t expect to achieve those numbers straight out of the gate.
The following example assumes starting with $500, adding $500 per month to the trading account, and achieving an average of 4% per month over 10 years…
…and doesn’t take into consideration any withdrawals for living expenses etc. (which is unrealistic).
After 10 years: Over $1.5 million.
Source: The Calculator Site
Investing Returns
Although some may scoff at the idea of ‘only’ making 8.5% per year through passive investing, considering it over a long-term horizon and how little effort is required…
It can become very attractive…
Consider this example, again, starting from $500 and investing $500 a month for 35 years from the age of 25–60:
Age 60: over $3 million.
Considering what else you could be doing with your time (including trading to grow it even quicker), this investing approach is something everyone should consider doing.
(You can run your own scenarios here: The Calculator Site)
Source: The Calculator Site
What is Financial Freedom?
Achieving financial freedom and becoming ‘Financially Independent’ can mean different things to different people…
…depending on location, lifestyle and living expenses, etc.
There are many different schools of thought on the different levels of financial independence…
When researching this article, I saw the levels go from Tony Robbins’ 5 levels in his book “Money Master The Game”…
All the way up to 12?!
No one is right or wrong; they all have different ways of sharing a similar message.
But I like to keep things simple… So we will stick with 2!
Level 1 — Financial Freedom
This means making enough *active and *semi-passive income to cover your cost of living and thus be free of needing to work for someone else.
*Active = income from actively working for someone else (a job) or your own business.
*Semi-Passive = income from products and services where you initially put in work but require minimal further input once made (royalties, blog, Youtube, digital products, etc.)
This is where ‘side hustles,’ etc., play a part…
Day trading or swing trading (when done correctly) will help you achieve Level 1.
Level 2 — Financial Freedom
This is where your investments generate enough passive income to cover your cost of living.
Meaning, if you never wanted to work a day in your life again… you could.
It requires no time input on your behalf (or your family’s if you’re planning ahead).
Obviously, as you increase your cost of living and lifestyle, the returns needed to cover it will also need to grow. (Not to mention inflation).
When planning your investments, it’s worth considering your minimum Level 2 and your ‘ideal’ Level 2 income.
Of note:
You will never achieve Level 2 Financial Freedom by day trading alone.
Trading can massively accelerate your journey to Level 2. Still, it is a form of active speculation… meaning it requires time input on your behalf.
Passive Income Confusion
I see many people (and ‘gurus’) confusing ‘passive income’ with ‘mobile income’…
The clue is in the name…
Passive:
“Not acting or inert.”
Passive income requires no input on your behalf…
…when you invest in a company, and they pay you dividends… you didn’t need to do anything to receive those dividends…
Mobile income (such as an online business) requires you to dedicate a portion of your time to running, operating, and maintaining your business…
It just means you can do it from anywhere in the world.. it is ‘mobile’,… not ‘passive.’
Which Should You Do?
The elephant in the room time… I am not a qualified financial advisor… I am a guy on the internet with a passion for finance, business and wealth building…
**Do not take any of this as financial advice. Always seek professional advice if you are unsure.**
I think everybody should invest for their future. I won’t get into a rant on how the state probably won’t be able to support the growing population…
But it is wise to allocate a portion of your income into investing for the future, whether the money comes from a job, your business, or trading stocks (or forex etc.).
Considering the time input, you probably already know whether you are interested in swing or day trading as a vehicle to achieve Level 1 Financial Freedom…
…or whether you prefer another business model (day trading is not for everyone).
Or whether you are happy in your job and will be happy to let passive investing and compounding do the work for you…
Final words
Now you hopefully have an idea of not only your goals in dollar terms for Financial Freedom for you.
But also, an idea of the difference between trading and investing, and which one is right for you…
Your goals, your passion, your life.
📚 Recommended Reading:
- The Intelligent Investor by Benjamin Graham
- Money Master The Game by Tony Robbins
- The Richest Man In Babylon by George Clason
PS: Some of the links in this article may be affiliate links that I may get a small commission at no extra cost to you 🙏
