Slow Twitch and Fast Twitch:

Implications of Trade Duration & Frequency when Investing

Forrest Gump is to Usain Bolt as long-term investing is to short-term trading. Rather, substitute our fictional Gump with real-life Rob Pope.

Pope and Bolt are both runners. Pope is a long-distance runner. He covered 15,300 miles in 420 days, running an average of 40 miles per day (BBC, 2018). Bolt is a sprinter. The Olympian is a world record holder in the 100 and 200 meters dashes at 9.58 seconds and 19.19 seconds (Biography, 2021). The former presumably benefits from slow-twitch muscle fibers, which are “designed for endurance” and necessary for long-distance stamina. The latter can likely claim fast-twitch muscle fibers, which are “good for rapid movements like jumping or sprinting that require fast muscle contractions of short duration” (Medicine Libretexts, 2020). The goals and strategies powering their respective running styles vary as significantly as the speeds and distances of their performances.

Similarly, some investors are motivated by and strongest in discovering long-term growth potential while other traders excel in finding short-term value opportunities. These different strategies to generating financial return can be equally calculated and successful but have fundamentally different approaches to market due diligence and investment intention.

Delineation by Duration & Frequency

When delineating between a long-term and short-term investment, consider first the duration of the investment. The length of time that you own a security determines the realized capital gains tax rate upon your sale of the security. Keep this number in mind: a one-year holding period. Realized capital gains are taxed as “short-term” if a security is held for less than a year and as “long-term” gains if held for 366 days or longer.

Separate from duration, trading frequency is key to determining investment strategy. Is the trading frequency considered passive or active? Passive trading meters out portfolio rebalancing on a predetermined fixed schedule — that is, an investor resizes, opens, and/or exits their portfolio holdings against a predetermined benchmark (e.g. S&P 500). Contrarily, active trading is indicated by regular trading of individual holdings in real-time reaction to market news, current events, and predetermined triggers. Both active and passive trading occur in long-term investments and portfolio management. However, short-term trading is primarily characterized as an active strategy.

The Costs of Trading: Trade Execution & Transaction Fees

With every purchase or sale of a security, there are both a transaction fee and performance cost associated with the timing of your trade. Transaction fees can be fixed or variable depending on the type of trade, the underlying asset, associated commissions, and the selected execution platform. The performance cost of your trade is indicated by the “good” or “bad” timing of your transaction as price and fees fluctuate intraday. Professional traders consider each of these factors in their net return calculations associated with each position. For consideration today, passive and long-term trading strategies typically have low associated trading costs & taxes while short-term and active trading strategies can incur higher commissions and taxes along with poorer execution (Zucchi, 2020).

Long-Term Investing Profiles & Strategies

Play the long game. Warren Buffet’s relentless adherence to his core investment thesis and its resulting multi-decade investments is largely recognized as his “secret sauce” behind his historical outperformance.

90% of his remaining estate is to be invested in low-fee index funds with the leftover 10% in short-term (liquid) government bonds upon his death. Berkshire Hathaway Inc.’s holdings are heavily weighted in top-performing blue-chip stocks: Bank of America and American Express, Amazon and Apple, Kroger and Coca Cola. Buffet plays the long game in his personal portfolio and in his professional recommendations. When approaching stock selection, he recommends an investor consider the transaction ultimately as buying a business. It may be a slice but it is still a part of the pie and it will only taste as good as it is made. Be confident in the 10- to 20-year horizon of your investment and the anticipated savoriness of your returns (Pitt, 2020).

In sharing his tips for the average investor’s success, Buffet repeatedly congregates at the common theme of long-term, buy-and-hold investing. Prioritize long-term gains over short-term wins. Assess your goals and risk tolerance to create a long-term investment plan. Build a diversified portfolio of stocks and funds across sectors and reinvest dividends. Be patient and generate wealth over the years and decades to come.

Short-Term Trading Profile & Strategies

Short-term and active trading is a prime strategy for those trying to beat the market average of return on investment (ROI). A trader’s success relies on their ability to repeatedly identify and time profitable trades, often for keeping positions for short holding periods (Zucchi, 2020).

With high risk and high reward, the gamble of active, short-term trading incurs equally high odds that the trader will inevitably lose… a lot. However, when you win, you win big and you win fast.

Successful short-term, active trading requires consistent and calculated adherence to core tenants of risk mitigation. It mandates daily fluency in market news and movements. Consistent analysis of market events and reactions. Making the right trades at the right times. Attention to moving averages to stock prices in order to identify patterns and capitalize on recognizable trends.

Understanding and applying fundamental short-term trading strategies can be the difference between cashing out in the black with a smile on your face or ending up at a loss with a bruised ego and potentially in the red.

What is right for you?

Discuss investment options and strategies with a financial advisor to determine the best fit for your investment priorities and risk appetite. Click here for additional information on common active trading strategies.

The content provided here is for informational purposes only and should not be considered a recommendation.

References

BBC. (2018, March 23). Liverpool runner beats Forrest Gump’s fictional running ‘record’. Retrieved from BBC News: https://www.bbc.com/news/uk-england-merseyside-43517715

Biography. (2021, January 12). Usain Bolt Biography. Retrieved from Biography: https://www.biography.com/athlete/usain-bolt#:~:text=Bolt%20is%20an%2011%2Dtime,2009%20Berlin%20World%20Athletics%20Championships.

Medicine Libretexts. (2020, August 13). 9.1B: Slow-Twitch and Fast-Twitch Muscle Fibers. Retrieved from Medicine Libretexts: https://med.libretexts.org/Bookshelves/Anatomy_and_Physiology/Book%3A_Anatomy_and_Physiology_(Boundless)/9%3A_Muscular_System/9.1%3A_Introduction_to_the_Nervous_System/9.1B%3A_Slow-Twitch_and_Fast-Twitch_Muscle_Fibers

Pitt, S. (2020, August 13). Warren Buffett: How ‘the average person’ should invest in the stock market. Retrieved from Acorns Grow: https://grow.acorns.com/warren-buffett-investing-advice/

Zucchi, K. (2020, June 9). 4 Common Active Trading Strategies. Retrieved from Investopedia: https://www.investopedia.com/articles/active-trading/11/four-types-of-active-traders.asp