Eight things buy-and-hold investors can learn from traders

You don’t have to be a trader to be affected by them, and these days the chances that you will be are growing.

 A combination of factors are driving that: heightened interest in and trading action around “story stocks,” fewer stocks to trade, easy access to trading tools creating more active investors and more.

Throughout the GameStop news cycle — which peaked along with the stock at $483 per share but which has since fallen back into the $40 range — market watchers talked about the bad behaviors of many traders, the late-arrivers, the hangers-on and others who bet big and lost.

But there were plenty of good behaviors on display as well, the kinds of actions that ordinary, long-term buy-and-hold investors could add to their playbook that would be helpful even though they aren’t following a trading strategy.

Moreover, if you find yourself surrounded by short-timers and traders in a stock you have as a long-term holding, you may need to change your game — at least in the short-term — to capitalize on the situation.

This is not a suggestion that average stock and mutual-fund investors start trading. Countless studies show that investors who overtrade their accounts wind up lagging both the average mutual fund and the markets.

But you can be a better long-term investor by applying the tenets of small, successful individual traders to your process.

Here are eight things that long-term buy-and-holders can learn from short-term traders:

Trade the plan. Good traders plan their trades, and then trade their plans. They don’t let the market dictate moves, they don’t let winners run past the right balance of risk and reward, they sell at a profit or loss rather than letting wishful thinking take over, and they offset aggression with patience, getting in only when the price, conditions and time are right.

Buy-and-holders have an ideal holding period of forever, many reviewing their performance and portfolio infrequently, so that if a security’s performance drifts or fades, they may not make changes until trouble has festered.

Buying and selling investments based on their ability to deliver to expectations is a way to make sure that the entire portfolio remains solid.

Use the right tool for the job. Traders seek out ways to make the most from each trade, whether that means buying stock, using options, juicing the situation with a leveraged exchange-traded fund or whatever improves their chances for success.

Long-term investors too often live by generalities, diversifying their portfolio without giving it much more thought than “I don’t own something like this.”

The result is a collection of funds, rather than a portfolio where each investment has a purpose.

If a new investment doesn’t enhance your portfolio — if it doesn’t have a specific role to play — wait until there is a real, solid reason to put money to work in new holdings.

Quantify risk and reward. Savvy traders look for situations where the odds of success are in their favor, where the potential upside is bigger than the probable decline if they’re wrong.

Think of them as buying when they see 50 cents of possible profit, but selling if the action moves against them by a nickel. If they don’t see the potential for wins much bigger than losses, they take a pass.

Long-term investors set expectations based on past performance, expecting positive results to be repeated and seeing down years as “bad as it gets” as if things can’t get worse.

Have specific expectations for everything you buy, an acceptable range of performance. Knowing what to expect from an asset class and monitoring results helps to avoid settling for laggards and mediocre performers that won’t crater a portfolio but will slowly choke performance over time.

Keep emotion out of it. Traders set limit orders and follow plans because it removes emotion from the process. It’s less about “favorites” and mostly about tools; the minute they see a better situation elsewhere, they move on.

Long-term investors let winners run, find it hard to rebalance, fall in love with things that have rewarded them in the past, wait during downturns to get back to break-even — as if that is somehow the mark of success — and rely as much on hope as on hard data.

Emotion breeds inertia; don’t hang on too long (“It was good to me once”) or fall for charismatic managers (“He looked so good on television”) when the numbers dictate that it’s time for a change.

Accept and move on from mistakes. Traders know they can’t win them all; they enter trades knowing roughly the loss they’ll take if their investment thesis is wrong, and get out — accepting that minimal loss — when the market works against them.

Long-term investors hang on indefinitely, hoping to recover any losses before selling and trying to come up with good reasons for holding bad investments. That’s why Americans have at least $6 trillion in below-average, lagging, mediocre or horrible mutual funds.

Size trades. While headlines focused on traders who bet way too much on GameStop, good traders don’t go all-in. Instead, they trade meaningful amounts, enough to get the juice if they’re right without feeling the burn if they’re wrong.

Size matters if each investment has a role to play in a portfolio. Don’t let any investment hold too much sway in your financial future.

Take profits. Traders build their profit point into their strategy, knowing when to cash out, or at least to take some winnings off the table.

Buy-and-holders are, by definition, not selling and taking profits.

If you’re not willing to take profits, you could ride the next upswing all the way back down. You’re playing to win; don’t be afraid to take your winners.

Remember the story that matters. Traders are only as good as their next trade; they worry less about individual winners and losers than about the direction their account is moving.

Don’t get caught up in the buy and hold. There’s no merit badge for being a longtime shareholder; honor comes to investors only if they achieve their financial goals.