Many active investors are known as “swing” traders. The swing traders usually look for a stock with good news coming down the road, and they buy into the stock. When the news happens, and the stock price jumps, they sell it. Of course, the lines between trade strategies can be fuzzy at times. I have noted a catalyst on the evening news and purchased a stock based on that news the next morning. By noon, the news had played out, and I sold out. Does that make me a day trader? According to FINRA rules, if you make four or more “round-trip” trades in a five business day period, you are a day trader. I have done a few one-day round trips, but I by no means consider myself a day trader.
I consider myself an opportunistic trader when it comes to my mad money account (and I’ve done a lot of ill-advised stuff preparing to write this book. Expensive lessons do last the longest!). Most of my portfolio is invested in well-diversified mutual funds that I plan to hold for an extremely long period. That is the big chunk of money that rarely ever moves that some investor’s call their “core position.” I call it my retirement account. I also have a much, much smaller “discretionary” account, what Jim Cramer refers to as “Mad Money” on his entertaining CNBC show by that name. This is where I match wits with Wall Street and try to grow my money a little faster than it would grow just sitting in an index fund.
Index funds are great, and they are the best passive investment you can get. I personally believe that index funds have a flaw: they follow an entire index, so they have good stocks, mediocre stocks, and downright bad stocks in there. (I will argue later that this is not a good enough reason to not use them exclusively in your retirement portfolio). In your mad money account, you can pick just the good stocks. If you do a bad job of picking these stocks, then you will be hurt. I am no hedge fund manager, so I do not invest my retirement account this way because of that risk. Even with the bad stocks in those index funds, they tend to return around 10% per year.