Consistency in Your Investing Strategy is Key to Success

One of the most common mistakes I see among new investors is a lack of consistency. I struggled with this same issue when I first got started, so I personally know how much havoc it can rain down on your portfolio balance.

When you first get started investing, you’ll usually have an idea of how you want to approach trading. Some people want to try day trading to book fast profits, while others are looking to hold stocks and other assets long-term to build up a retirement account and take advantage of compounding interest.

Either of these basic strategies can be successful, but your chances to succeed plummet when you carelessly mix these two trading methods. This article is going to explain why it is so important to stick to a consistent investment strategy and the most common ways that cause investors to make mistakes.

Long-Term Holding

When you’re buying stock in a company like Amazon or Tesla to hold for years or even decades, you’re betting on the fundamentals of that company and their future success. The same can even be said for cryptocurrency such as Bitcoin. Even though there isn’t a company behind BTC and it’s value, when you want to hodl for 10+ years you are still focused on what will happen in the future and not tomorrow or next week.

One of the biggest problems that I notice among new traders is the tendency to flop back and forth between holding and swing trading. Recent history is a great example to use here. In November 2021 Bitcoin hit new all-time highs. A lot of people bought coins to hold long-term around that time or even in the months that followed as the prices dropped.

When you invest $70k and then watch as it falls to 50k then 40k and eventually as low as 17k, it is extremely easy to lose sight of your original goals. This fear will often cause a beginner to sell and cut their losses. Sometimes you may even try to sell to buy it back later at a lower price, but you have to be careful about wash sale rules when you take that approach (although this doesn’t apply to crypto yet but likely will soon). It’s also easy to get stuck buying back the asset for a higher price, especially if you’re waiting 30 days.

If you are buying for the fundamentals of an asset long-term, it shouldn’t matter what happens short-term. In fact, you’ll be better off if you can ignore your long-term portfolio balance. Looking at it can cause you to make a mistake if you haven’t conditioned yourself to resist the urge to sell yet.

Until you sell, you don’t actually lose money. If you bought because you think the value will be a multi-bagger after a few years, hold that stance unless something changes. During a big market downturn and again when a recovery rally starts to take place, I’ll take another look at the company to make sure they’re still on track for future growth. The only time I will sell a long-term position is if market conditions change that cause the company to decline to a point where they likely won’t recover.

Swing Trading

A day trader is almost the opposite of a long-term holder. With day trading, you actually don’t care what will happen to a company in a few years or even next week. The current moment is all that really matters. You’re looking to trade the price swings up and down that happen every day. When you buy a position expecting prices to immediately rise and they fall instead, you want to cut your losses and close the position as quick as possible. That’s pretty much the worst advice for a long-term holder but business as usual for a swing trader.

I believe that this consistency problem is at it’s worst when you start to view a long-term position as a day trade. That is when you will slip up and sell for a loss that never should’ve been booked. Once you sell, you start looking to buy something else and likely make another mistake by rushing a trade. Sometimes you even flip strategies afterwards from long-term holding to day trading.

When you set out to hold assets, stick with that plan. The same goes for day trading. You don’t want to lock up money in a long-term position when you’re day trading. This means that no matter which strategy you target, you can’t flip back and forth or you will destroy the advantages that come along with each trading strategy.

Tax Consequences

Many retail investors that aren’t familiar with federal income taxes and how they work with investments will find themselves facing an unexpected tax bill. Someone holding an asset for years will pay different tax rates compared with short-term holders. When you flip back and forth between strategies, it’s much easier to get mixed up and make a mistake.

A holder will not usually have any kind of a tax bill due each year until they want to cash out and sell. When this becomes a habit for you, you may end up making a trade not even aware that you’re generating a tax debt for yourself by doing so. This can come as a big surprise at the end of the year when your tax documents are released and you prepare to file a return.

Day traders have to be extremely careful with their purchases to avoid the wash sale rule. Someone automatically buying stock with a retirement account may not even be aware of that rule that prevents you from selling and buying back a security within 30 days. You can still make that type of trade but you won’t get to book the losses from the sale until you actually sell it again.

Let’s look at a hypothetical scenario as an example here:

You buy 300 shares of Tesla stock for $100 per share. After a few years the price has gone up to $1,000 per share. You haven’t touched it that entire time, so you’ve never had to think about tax debt from investments.

Then a recession hits. The price drops to $900 and then again to $800. You start to worry that you might lose all of the profits you’ve made so far. After taking a close look at the market and seeing what professional analysts have to say, you feel like the prices will continue to fall. Some people are calling for shares to plummet down to $200, so you decide to sell.

You unload 300 shares at $800, convincing yourself that you’ll simply buy back in at a lower price and multiply the total shares you own.

The cost of the original $300 shares at $100 was $30,000. Selling those shares at $800 gives you $240,000 – a profit of $210k.

Even if you successfully buy back in at $200 a couple months later and end up with 1,200 shares, there’s still one big consequence to this trade: you have to claim that $210,000 as income and pay income tax on it.

You could face a $31,500 – $42,000 tax bill from that sale (at 2022 rates of 15% – 20% long term capital gains taxes, depending on your income level).

Asset Separation

When you can solely focus on either long-term holding or day trading, it keeps things simple for you and helps avoid mistakes. However, if you want to mix both strategies, try to find a way to separate your assets for each trading strategy. This could be as simple as opening a second brokerage account for stock trading.

I mostly hold long-term with stocks, so I just keep those assets in a brokerage account. Cryptocurrency is a bit different though, since I do both long-term hodling and day trading. This is where I ended up making some big mistakes switching trading strategies and not being consistent in my early trading days.

Once I lost a few grand with a big careless mistake, I took steps to separate my crypto assets. Anything I’m holding for a year or more will go into a hardware wallet. Cash and assets for day trading will stay on my exchange account and get transferred to a bank account as necessary to ensure I don’t risk too much by leaving it on an exchange. Having this type of separation worked wonders to help to train myself to be consistent with my investments, and this has made a huge different with profitability.