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Invest in the Short or Long Term and the Rule of 100

A day trader is someone who generally closes a position within a day after having opened it. He buys and sells the investment the very same day. People do this because it supposedly generates more profit, or simply because it is their style. 

 

The opposite situation exists as well, investors who invest for the next 20 years or for the rest of their lives. Of course there is also the way down the middle, for example, people who keep their investment for about a year. There are pros and cons to each style and it heavily depends on which form of investment you want to invest in. Buying a house and selling it the same day for example, would generate so many costs, you can never make a profit from it like that.                                  

In any form of investment there are costs involved when making the investment. If you invest often and a lot, this would mean the costs are high. Generally speaking, long term investments generate fewer costs.

What is the rule of 100?

Age also matters. According to the rule of 100 there is a connection between the amount of risk the investor can take and the investor’s age. A long investment horizon can reduce risks. As you get older you have to take fewer and fewer risks. This rule says you should invest 1% less in high risk investments every year. Bonds are generally less risky than shares. If you are 50 years old, you should invest only 50% of your income in shares or ‘risky’ investments. The remaining amount should be “invested defensively.”

Why this rule?

The rule of 100 is actually a theoretic rule only, in practice this is hard to measure and realize. Still there is a certain degree of truth to this rule. If your investment horizon is long, shares will have a better profitability than low risk investments. However, if you are older and you are getting closer to retirement, you should limit the risks. In other words: the time you have left to recover from a loss is shorter. The shares market is unpredictable in the short term. In the long term you can get a good profitability with a lower risk than in the short term.

A great example is to invest in diamonds. In recent years it has become clear that the diamond price structurally continues to increase, due to the limited supply and the increasing demand coming from the East. Furthermore, diamonds are barely subject to inflation, crises and currency fluctuations.

Evidently, the rule of 100 does not take one’s life expectancy into account. This rule is just a guideline after all.