Time Is The Missing Ingredient

A significant amount of recent commentary has been devoted to Robinhood, the phone app that lets people trade stocks for free. It is heralded as breaking down barriers to entry for marginalized communities. Others criticize that it has targeted under educated individuals and it has been accused of being the cause of at least one suicide. At its heart, however, the app seems to be the paragon of short-term investing. While that may work in some instances, time is the inalterable secret to almost any investment strategy.

Short-term predictions in the stock market are difficult to get right. Even for professional investors. A recent study suggests that retail investors (i.e. regular people) do worse than long-term passive investment funds (so called index funds) by a margin of over 2%. In the face of the data, a choice to day-trade stocks on a platform like Robinhood is a choice to either (1) do something that is a hobby and fun for you or (2) assume you can beat the averages. Far be it from me to diminish anyone’s hopes of being above average or do what they enjoy. Just realize the context of those activities in the face of the data.

In either short-term investing or long-term investing, time is still the most important element. In the day trading scenario, timing is “the” element. Being right about time is much more important in the day trading context because there is likely not going to be a long time horizon to make up losses. However, strategic losses can still be useful. Short term capital gains can be offset with short term capital losses in US federal tax law. So timing the strategy on the upside is as important to timing the downside for the day trader.

For a long term investor, time is the driver of growth. That is, the assumption in long term investing is that short term losses may be offset by long term gains. Additionally, absent tremendous economic distress at the moment the investor needs significant access to investment dollars, timing the withdrawal of funds is less important because there is no intent to withdraw significant amounts at any one moment.

However, short term timing issues are also important for long term investors. This usually manifests itself in the form of timing loss harvesting. In other words, selling losing positions strategically to trigger long term capital losses that can be used in US federal tax law to offset long term capital gains.

All of this is to say that whatever type of investor you are, time is an essential element.

None of this is meant as investment advice. Rather, I share this as my observation of how my legal clients (who are mostly high net worth and ultra high net worth individuals) have accumulated their wealth by strategically using time to their benefit.

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