Saturday, 6 December 2014

Difference between Investing and Trading

You may ask, what are the differences between investing and trading?

Personally, I put most of my money into an investment account where I only buy assets which pay good dividend for the long term. I recommend building a diversified portfolio with bonds, ETFs and REITs. You can allocate the percentage of asset class based on the level of risk you are willing to take (e.g. 30% bonds, 60% equities, 10% REITs). With bonds prices expected to drop as interest rates increase within the next few years, you can rebalance your portfolio by buying more bonds. I like this idea (from Andrew Hallam's Millionaire Teacher) as it is essentially a safe and easy (although not exciting) way to build up your wealth. For the active investors, of course you can do stock picking. I like to stock pick myself but it does not always work out well.

I am only using risk capital to trade for the sake of learning as well as to complement my investments. Although trades position are held for relatively shorter period of time, by learning how to follow the trend, it will be easier to identify entry opportunities for longer term investments. Example: I bought into VALE on the strong market share, high dividend (although it might be cut soon because of losses) and record low iron ore prices due to supply glut. It has fallen over by a considerable amount from approximately $15 to $10 within a year. My analysis is that VALE's share price is negatively affected by many external factors like the Brazilian currency and political events. It is nonetheless the biggest producer of iron ore and it is a matter of time before demand picks up again. It is a good investment in my opinion. However, given the developments in recent weeks, the share prices could drop for a further 10-20% as they reported a surprise loss. I won't know and cannot predict that. If only I have waited till the long term trend turns up...

Have a good weekend all.


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Financial freedom = Passive Income > Expenses. Always remember that there are two sides to the equation of financial freedom. Beside working on how to improve our passive income through investing, we should never neglect the expenses portion. By striving to improve both side of the equation, we can achieve our financial goals and win in the game of money.

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