Why ‘one big win’ thinking destroys long-term growth
Day trading is a fast-paced strategy where people buy and sell stocks or other assets within the same day. It offers people a chance to earn money quickly by predicting small, short-term price changes.
If you’ve been scrolling through social media, there’s a lot of people who are day traders and offer advice to get started yourself. But beneath it all, day trading can be seen as a riskier approach that requires constant attention, capital, and a high tolerance for loss.
How day trading works
Day traders typically look for the "ups and downs" of a stock's price. They pick up on patterns to analyze and predict where a price might go in the next few minutes or hours.
Because price swings are often tiny, day traders frequently use leverage, or borrowing money, to make larger trades. This can amplify profits, but they also risk bigger losses. By the time the market closes, a day trader usually closes out all their positions and holds no stocks overnight.
The reality of day trading vs investing
It can be easy to associate day trading with investing, as they both involve having your money in the market for a period of time. However, the approaches and related risks for both are completely different.
If the market was an ocean, day trading is like trying to predict every individual wave in the ocean, while long-term investing is letting your money move with the waves, no matter how strong or slow the currents are.
| Feature | Day trading | Long-term investing |
| Time horizon | Minutes or hours | Years or decades |
| Risk level | High | Lower (over time) |
| Primary goal | Short-term gains | Long-term growth |
| Effort | Full-time monitoring | Automated and ‘hands-off’ |
Data suggests that the "get rich quick" allure of day trading rarely pans out for the average person. In fact, research on individual traders has shown more than 80% of day traders lose money over periods longer than 300 days. In comparison, when we look at the historical data for the S&P 500 Index, there hasn’t been a 20-year period where the S&P 500 Index (with dividends reinvested) yielded a negative total return, even when including the Great Depression and the 2008 Financial Crisis. Of course, past performance doesn’t guarantee future results.
Why do day traders risk losing more money?
Day traders take on more risk because their money is all in one basket. They buy and sell on one or more individual stocks. If their prediction goes the opposite way, there aren’t other stocks to help cushion the potential loss.
There’s also the issue of timing. With long-term investing, your money has the opportunity to recover from market dips and any potential losses. With day trading, they ‘lock in’ their losses when they close out their positions for the day.
What actually drives long-term potential?
At Acorns, we believe in looking after the financial best interests of the up-and-coming. To do that, our philosophy is built around diversification and small, consistent habits to help drive long-term potential.
With diversification, your money is spread across many different investments rather than in a few. If one stock drops, the rest of your portfolio can help absorb the impact. There’s no guessing involved, or need to track the ups and downs of a certain stock.
When you tap into our automated tools, like Round-Ups® and Recurring Investments, you can invest without having to think about it. Instead of stacking big bets, you stack small, consistent investments that have the potential to grow over time.
While you can take a little risk, keeping most of your funds invested in a diversified portfolio can help cushion any potential losses and keep you on track towards your financial goals. 🌱
Frequently Asked Questions
Is day trading considered gambling?
While day trading involves market analysis, many experts have compared it to gambling because of the higher risk and the role that chance plays in short-term price movements. Unlike long-term investing, day trading can be considered a "zero-sum game" where one person's gain is often another's loss.
What is the best alternative to day trading?
For most people, a "set it and forget it" strategy like Recurring Investments is the best alternative. By investing a small amount regularly, you take advantage of dollar-cost averaging, which can help you lower your average cost per share as you buy more shares when prices are lower and fewer when prices are higher, without the stress of watching the clock.
This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns’ clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.
For informational purposes only. Strategies and investments discussed may not be suitable for all investors. Contents of this article have been generalized and should not be considered investment advice, a recommendation, or be construed as an offer or solicitation to buy or sell an interest in any specific security. Information contained herein has been obtained from sources believed to be reliable; however, the accuracy cannot be guaranteed and is subject to change without notice. Investing involves risk, including the loss of principal. Please consider your objectives, risk tolerance, and all fees before making any investment decisions.
Investment advisory products and services offered by Acorns Advisers, LLC ("Acorns"), an SEC Registered Investment Adviser. Brokerage products and services are provided by Acorns Securities, LLC, an SEC registered broker-dealer, Member FINRA/SIPC.
The S&P 500 Index is a weighted index of 500 leading publicly traded companies in the U.S and often used as a market benchmark. This is a hypothetical illustration of historical Index performance and is for informational purposes only. References to total return includes the reinvestment of dividends and results are not adjusted for inflation. It is not possible to invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
Diversification and asset allocation do not guarantee a profit, nor do they eliminate the risk of loss of principal.
Dollar Cost Averaging and Automatic investing do not ensure a profit or protect against losses. It involves continuous investing regardless of fluctuating price levels.
Acorns Invest is an individual investment account which invests in a portfolio of ETFs (Exchange-Traded Funds) recommended to customers based on their responses to the Acorns investor profile questionnaire.
Spare change invested with Round-Ups® is transferred from your linked funding source (checking account) to your Acorns Invest account when activated. Round-Up investments from an external account will be processed when your Pending Round-Ups reach or exceed $5.
In a typical six-month period, more than 80% of day traders lose money after accounting for costs and fees, according to Cabot Wealth.
