Investing in the stock market: trading or passive investing?

For many investors, investing in the stock market is considered something complicated, requiring special knowledge to make money, and therefore intended for professionals or a few enthusiasts who are willing to devote the necessary time to this.

This vision of a stockbroker, whose eyes we imagine is fixed on the prices of the stock market, corresponds to a certain style of investing: trading. In fact, this method of investing is very different from what most stock investors use.

We will see why trading is an investment method that is not very suitable for individual investors, and what strategy should be used to optimize the performance and time management of your investments in the stock market.

Trading: time-consuming and risky

Trading is an investment style consisting of buying and selling stocks (or derivatives) with a short or very short investment horizon (from a few minutes to a few days).

This way of investing is an independent activity because trading takes a lot of time. For good reason, an investor must constantly monitor the development of financial markets, keep abreast of the latest economic news and adjust their portfolio positions in real time. Trading also requires a good knowledge of macro and micro economics.

This investment method is difficult to envisage for individual investors. That is why only enthusiasts are willing to devote many hours to this. You have to pick the right stocks, buy and sell at the right time, which is very risky and stressful.

Ordinary investors who want to take advantage of the good performance of the stock market can implement a much simpler and equally effective strategy for investing in the stock market: passive investing.

passive investment in the stock market

The principle of passive investing is based on holding stocks for a long time, limiting the amount of intervention required from an investor to manage their portfolio, and favoring investments in trackers (index funds, returns later).

Investing in the long term allows the saver to take advantage of tax-efficient savings schemes such as Savings for Shares (PEA) and life insurance. Indeed, with a PEA for more than 5 years or a life insurance for more than 8 years, the contributor can withdraw funds while receiving reduced capital gains taxation. Only social security contributions are collected from capital gains (taxation reduced to 17.2%). These are envelopes for capitalization, i.e. the sale with capital gain does not cause taxation (only withdrawals). Thus, under PEA and life insurance, an investor can increase their savings, choose between their investments, and reinvest their earnings without tax friction. Capital is in full swing.

Conversely, short-term investments (trading) by multiplying transactions in a regular securities account (CTO) do not provide any tax advantage. Dividends and capital gains are taxed at a rate of 30% (flat tax) or income tax scale.

But for the passive investor, the challenge is to spend as little time as possible managing your investment. Ideally, he does not want to ask himself questions about choosing stocks to include in his portfolio. However, building a diversified stock portfolio takes time and involves placing multiple orders in the stock market. There is an alternative to direct equity investment: investing in equity funds.

Investing in equity funds.

Then the question arises, which funds to apply to. Passive investors turn to index funds en masse, such as trackers and ETFs that replicate the results of the Nasdaq or CAC 40. They favor funds with strong geographic and industry diversification. Among the reference indexes for investing in the stock market, MSCI World can be noted. Amundi and American giant BlackRock (with its iShares line) are two asset management companies that offer a wide variety of ETFs. Index funds have very low annual management fees (typically around 0.20% or 10 times less than active funds), which optimizes performance minus investment fees.

Once the investor has chosen his tax package (PEA or life insurance) and investment vehicle (an index fund as suggested above, or whatever), he asks himself one last question: When is the right time to invest? To properly capture stock market performance over the long term, a popular strategy right across the Atlantic is DCA (dollar cost averaging). It consists of investing a fixed amount at regular intervals without trying to anticipate the short-term evolution of stock markets. The most organized passive investors set up an automatic payout program, for example, allocating 300 euros per month under a life insurance contract.

Mark

For readers of Echos START, our partner Avenue des Investeurs, an information and financial education portal created in 2018 by two passionate investors, shares their personal finance knowledge.

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This forum was written by a member outside the editorial board. Les Echos START does not pay him and does not pay for the publication of this text. Therefore, the choice for publication was made solely on editorial criteria.