Smart Money Podcast: Strategies for Advanced Investing and Active Trading

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode: Discover the risks and rewards of active investing, and when to consider calling in professionals for trading decisions.

Sean Pyles talks with investing Nerd Andy Rosen about the ins and outs of advanced investing strategies. They tackle the topic of autonomy over your investments, examining the rewards and risks that come with managing your own portfolio. They also discuss how to assess your risk tolerance so you can make more informed decisions, then introduce some of the diverse strategies people use to invest.

Sean and Andy then demystify the world of active trading and explain how paper trading can help you test your investing skills without risking any money.

Check out this episode on your favorite podcast platform, including:

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NerdWallet stories related to this episode:

Growth vs. Value Stock Investing: Understanding the Differences

What Is Swing Trading?

9 Investment Strategies for New Investors

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Episode transcript

Sean Pyles: So you've done some investing for the long term. Put some money in an index fund, maybe a few bonds. Maybe you've even stuck a toe into an individual stock investment, but you keep hearing the siren call of the market, and you're wondering if there's more.

Andy Rosen: Investing involves providing money, even temporarily, to support some kind of economic activity, the growth of a business, the exchange of an asset or even just helping the market determine the proper price of an asset. These activities are essential in society as it's currently set up, so you can think about it as playing a small role in the grand economic picture.

Sean Pyles: Welcome to NerdWallet Smart Money Podcast. I'm Sean Pyles.

Andy Rosen: And I'm Andy Rosen.

Sean Pyles: This episode kicks off our nerdy deep dive into next-level investing. We are leaving the land of safety, people, so listen at your own risk and figure out your risk tolerance because we are no longer in the slow and steady lane.

Andy Rosen: That's right, Sean. Full speed ahead. Well, maybe after you've listened to this series and after you've put all the necessary funds into your retirement, a college savings account, and after you decide how much you're willing to lose.

Sean Pyles: All right. So, Andy, will you please tell me why we are doing this exactly? Because Smart Money is practically built on a foundation of what's the lowest-risk way to make your money grow. We spend a lot of time on index funds, high-yield savings accounts, CD ladders. We're always telling folks that they don't have to chase massive returns. We caution against active trading. So what are we doing?

Andy Rosen: We're throwing it all away, Sean. No, I'm kidding.

All of the rules you talk about every week on this show still apply. I don't think there's any doubt about that perspective for anyone who's listened to this podcast. It's about caution, about prudence, about making sure your primary nest egg is taken care of.

On the investing team, we do get a lot of inquiries from people who want to know more about the more advanced side of the market, even things they might decide they don't want to do once they find out about them. There are even a lot of people who are confused about what it even is to have exposure to the stock market. Even if you have exposure to the stock market through your 401(k), for instance, you might not even think you do, and you might think the only way you can do that is to have a bunch of screens in front of you and wheel and deal all day. It's not like that.

But learning about some of these more advanced strategies can help you understand what you are comfortable with and also what you're not comfortable with because a lot of this stuff is going to be high-level, and there's a lot of risk.

Sean Pyles: Yeah, but I'll say there's a big difference between things like investing in a 401(k) or a Roth and then going to the other end and doing options trading and short selling and real estate investing and even day trading, things that make me want to run away.

Andy Rosen: Don't run away yet, Sean. At the very least, we're hoping this will be an education in how some of the more risky markets work. Just because we're talking about how something works doesn't mean we're saying you should do it. This isn't advice anyway, right? But if we do our jobs here, I think you'll be just as likely, if not more likely, to learn about the reasons some of these strategies wouldn't work for you and where your risk tolerance lies, because I think that's something people really should understand.

I'm hoping to also help folks understand the global economy better. There are all sorts of things that happen every day all over the world and help shape the economy. So even if you don't want to put your money in derivatives, it's good to understand how they work, the risks and rewards, and what happens when people buy and sell them themselves. So that's what we're talking about with next-level investing.

Sean Pyles: All right. And as always, when we talk about investing topics, a reminder from the lovely folks on the NerdWallet legal team: We Nerds are not financial or investment advisors; we'll not tell you what to do with your money. Everything covered in this episode and the series is to provide you, our dear listener, with the knowledge to make informed decisions with your own money.

All right, well, we want to hear what you think too, listeners. To share your ideas, concerns, solutions around investing beyond retirement funds, leave us a voicemail or text the Nerd hotline at 901-730-6373. That's 901-730-N-E-R-D, or email a voice memo to [email protected].

All right, let's start with some of the basics here, Andy. Well, I guess they're not really basics, since this series is called Next Level Investing, but give us a sense of what we mean when we talk about advanced or active trading.

Andy Rosen: OK, so this could take many forms. Active or advanced trading can mean different things to different people. And the way that we're going to talk about it in this series, I think what we should say is it means taking on more autonomy over where your money is invested, from maybe where you are right now.

So there are a lot of different ways to think about this, and chances are you might be doing some of these things already. This could be picking your own portfolio of stocks or other investments or deciding when to buy and sell them, or it could be ducking under the hood of your own retirement accounts and making some adjustments to the funds you're investing in through your retirement savings.

Now, before we get in deep on any of this, though, I want to note that there are some real pitfalls to advanced investing and, really, especially, to managing your own portfolio in a significant way; even a little piece of it can carry some risks. So if you're just getting into investing in general, you may have higher-impact, lower-risk options available to you, like getting the maximum match from your company on your 401(k). If you're not doing that, you can basically get free money by putting in more of your own. You don't get a return on investment like that very often with the market alone.

Sean Pyles: Got it. So when we talk about active trading, is this basically day trading then?

Andy Rosen: Day trading is certainly one of the things you can do and that fall under this category. When you're day trading, what that means is you're opening and closing positions, or you're buying and selling stuff, within the course of a day, and what you're trying to do is capitalize on price movements or potential anomalies that might help you outperform the market.

Now, you don't have to be in and out of every investment before the sun goes down to be an active trader. You can also be a swing trader; this is another term for short-term trades in which you complete trades within days or weeks, again, as a way to capitalize on short-term price movements.

With these two approaches, what they have in common is that they rely on something called technical analysis. And what you're doing there is you're crunching numbers and studying charts and doing data analysis in hopes of understanding why the market might be behaving in a certain way. Is there a large chunk of investors in a specific asset looking to sell off and lock in some gains at a certain price level, for instance? At what price might they do that? Investors use technical analysis to try to find those optimal price points where they could buy and sell under whatever market conditions exist.

But if you ask me, active trading goes well beyond either of these short-term activities, and it can inform an approach to longer-term investing, too.

Sean Pyles: Yeah. All right. Well, when we talk about investing on this podcast, we often discuss a long-term, diversified approach that seeks to take advantage of the market's historic tendency to rise over time. So how can you be an advanced long-term investor?

Andy Rosen: So if you think about it, the conventional way for most investors to approach the market, even if you're just investing through your retirement fund, is you're buying a lot of different things, often through passively managed index funds that more or less track the market at large, and you hold them for a long time. One common rule of thumb is you hold them for at least five years.

Now, that sounds like a lot, and it doesn't sound very exciting, and it's not. But remember that a lot of people get their primary exposure to the stock market through their tax-advantaged retirement accounts, and unless you're about to retire, you're going to be holding those investments for more than five years.

Now, you can have a long-term, diversified portfolio that you manage yourself, even if it's not your primary nest egg. And just a parenthetical that a lot of advisors would argue that you should leave your long-term primary nest egg with a pro. But we talked before about technical analysis, but for longer-term trades, you're probably going to be using something more like what's called fundamental analysis, and that weighs an asset's performance. Do you expect a company to be highly profitable in five years based on its prospects today, for instance? All that said, when you're picking investments yourself, I would argue that you're going into an advanced level of investing, whether you're doing it over the course of a decade or a day.

Sean Pyles: Andy, is this really a question of whether to hire a pro or go DIY, like hiring a plumber?

Andy Rosen: I do think this analogy works on a lot of levels. So if your faucet is leaking, are you the kind of person who ducks under the sink with a wrench to see if you can figure it out? Before this podcast, I was just trying to change a light fixture in my daughter's room. So yeah, you can save a few bucks if you don't call the handyman, and as long as you know how to shut off the electric or the water supply, you can only mess up so bad.

Similarly, with your investments, you might want to take on some of the responsibility yourself rather than paying an expert to do it, but you do want to know where the shutoff is, right? Then, in the same way to avoid making a mistake, you can survive.

Now, in this series, we're going to talk about trading strategies in which you can lose more than your principle, more than you even invested to begin with. You can be in the hole. And we're going to talk about that. But you want to have a really clear understanding of both the upside and the downside of whatever you're doing and only risk money that you can afford to lose.

So here's the bottom line: Just like with plumbing, investing can be very messy and very expensive if you get in over your head. So remember, this is a matter of degree. I might be able to tighten a nut and fix a slow leak under a sink, but I don't see myself as qualified to dig a trench across the sidewalk and replace the connection to the city water lines. In the same way, I might dabble in the markets with some of my free cash, but I'm not going to personally be comfortable putting my life savings on the line.

Sean Pyles: Yeah, I'm a person who is very gung ho about hiring contractors and not doing work myself because I don't want to mess things up. So tell me, what are some reasons that folks might want to pursue active trading and maybe grab that wrench?

Andy Rosen: Well, not to push the metaphor too far, but it can be satisfying to do something for yourself. It can be satisfying to understand how the things in your life work. And doing work that experts might otherwise do for you is a way to learn about that, again, when you've taken the necessary precautions. I think you might want to get your hands dirty, for instance, as a way to understand the forces of global finance, right? The peculiarities of markets will have a vast impact on your life, whether you participate or not. So even a little bit of self-directed investing can give you a better view of what's happening on Wall Street, what's happening in Congress, et cetera, and why, like what's happening in your workplace.

So from a more realistic perspective, though, I think some people are looking to invest on their own because they hope they can make quick cash, and that is truly a riskier proposition. Your own financial situation is your business. It's your right to do what you think is best with your money, but you really ought to think about the risks you have to take on.

Sean Pyles: Right, because that risk does involve the possibility of losing your shirt. And I don't know, I'm going to bring back this metaphor, maybe all of the pipes and toilets in your house.

Andy Rosen: Right. If you've ever had your basement flood, you know there is a bridge too far. But you can only lose your shirt if you have your shirt on the line. If you're looking to build some experience or take a flyer with some free cash, the worst that can happen, assuming you follow the law and make sure you understand what you're signing up for, is you lose some spending money. Losing value or losing money on investments is a really good way to figure out what your risk tolerance really is.

It's easy to say, "Oh yeah, I'm fine losing this amount," but when that actually happens, it can be good to take stock of how that feels. Did it really feel fine, or was it more painful than you thought? Because if it affected you financially more than you realized, losing that money might be a really good lesson that you can learn from.

And it's worth noting that some brokers, online brokers even offer something called paper trading, where you can trade using fake money and see how you did. I never turn down the chance to say this: I won a statewide investing contest in Massachusetts as a high school student doing something like this. I bought one stock in the class with my colleagues, and we held it and did our homework for other classes in this class the whole time, and it managed to outperform every other student. So it shows you that smart and lucky are different things. But again, paper trading may not teach you much about how you react to losing real money. If I had real money on the line, even in high school, I might have paid more attention to what I was doing.

But yeah, if you're an inexperienced investor who gets in over your head, you really can be in for some pain.

Sean Pyles: Yeah. And this is probably a good time to say that studies have shown the returns on active investing are worse than my preferred boring buy-and-hold investing strategy, where investors typically hold on to investments for many years. So if you're risk-averse and want somewhat more reliable returns, like me, this may not be for you. But on the other hand, if you have shirts to spare, active investing could be more interesting to you.

All right. So, Andy, what does active trading actually look like? Are you just picking stocks in your portfolio? Does it involve ETFs, currency trades? What's going on?

Andy Rosen: You might think of the stock market as the main domain of the active trader, but in this series, we're going to cover a lot of the big areas where people tend to look at trading. Could be anything from what's called Forex, that's basically wheeling and dealing foreign currencies for one another as they move in relation to one another. You could look at real estate, commodities like precious metals, or even contracts to buy and sell stuff like wheat, oil, grain, things like that. There's cryptocurrency, which we've talked a lot about in the past. And there's even art and collectibles. If you still have your baseball cards, you might want to take stock of what those are worth, but …

Sean Pyles: Or Pokemon cards.

Andy Rosen: Exactly. Your Pokemon cards could be worth quite a bit.

But even within the stock market, there are plenty of options that you can tailor to your own risk appetite. If individual stocks are too much for you, for instance, you can try ETFs, which are called exchange-traded funds. And these are things you can buy or sell on stock exchanges, but they focus on a particular sector of the economy, a category of equities or other ways of categorizing investments. And if you're feeling less risk-averse, maybe extra saucy, you can look at trading options or various kinds of derivatives of stocks. Again, this is higher risk.

Sean Pyles: Right. And Andy, I've actually always thought about the stock market as a bit like going to Vegas, and I'm not a huge fan of Vegas. So when investing, you have to be prepared to lose all the chips, and is that the mindset for active investing, too?

Andy Rosen: I don't know. I hear this analogy a lot, and I don't think I can say enough that you need to be cautious when you're investing your own money or when you're gambling your own money. There are some similarities between gambling and investing, of course, and some of the distinctions amount to moralizing — which is more virtuous, right? And that's for individuals to decide. In both cases, you're putting real cash on the line based on your opinions about the likelihood of some future outcome.

On the other hand, investing involves providing money, even temporarily, to support some kind of economic activity, the growth of a business, the exchange of an asset, or even just helping the market determine the proper price of an asset. These activities are essential in society as it's currently set up. So you can think about it as playing a small role in the grand economic picture.

Gambling, on the other hand, involves giving money to a casino, which will return it and then some or keep it based on your success in guessing what will happen. It's a game, and there's not much going on in the background. Of course, they have employees, and they pay taxes and things like that; they're not divorced from the economy entirely, but it's a game.

Sean Pyles: Yeah, I feel like every two minutes during this conversation, I should be saying to the listeners, "Listeners, by and large, you probably don't want to do this. Stick with index funds." So why are we talking about it?

Andy Rosen: All right. You can cue the inspirational music now. Yeah. I'm not sure it's our job as financial writers to tell people what they should and shouldn't do. And we said it at the beginning of the episode, and we'll say it again here. This is not individual advice. We're not your financial advisors. But saying not to do something is advice, too, and we should remember that. Listener, you have to make your own decision, and then we can help you understand the concepts and the process you're going to be encountering once you carry that decision out.

The stock market is available to anyone who is qualified to set up a brokerage account. There are many other opportunities to evaluate and carry out investments on your own. We can tell you that historically, it's hard to beat the market. Sean, you just said that. And so an index fund may be a less stressful way to deploy your capital, but that doesn't mean that no individual investor can beat the market. Even a beginning investor can get lucky or have a great insight. Is that likely? You heard the stats earlier. But if a reader comes to NerdWallet having made a decision that they're going to do their own trading, I think my job is to tell them about how to make smart moves from there rather than telling them they're wrong.

Sean Pyles: That's fair. I appreciate that. Well, to balance all of this out, talk us through alternatives to active trading. What does that look like?

Andy Rosen: Right. I think this gets lost sometimes. You can have exposure to the stock market or various other asset classes without being a day trader, without being an active trader. And again, if you have a retirement account, you're already doing this. The alternative, at its very basic level, is to let someone else make your financial decisions for you, and that might sound a little paternalistic, but it's not as bad as it sounds. Many financial advisors have what's called a fiduciary responsibility to you. They're required to act in your best interest, and chances are they have a lot more experience than you do.

Beyond that, it's likely your nest egg is already tied up with funds that are managed by professionals. These can be actively managed funds in which decision-makers are actually carrying out trades based on their own analyses. But we've also discussed lower-cost index funds that are basically just following part of the market. For instance, you can buy into an index fund that tracks the S&P 500, which is a collection of some of the most valuable stocks that are available, and it has a decent record for historical returns.

If you're in a conventional employer-sponsored retirement account, you're going to be investing in big funds targeted toward your retirement goals. So again, it's not one or the other. You can leave all or most of your money with the experts and keep a little bit aside to try your own luck.

Sean Pyles: OK. Well, Andy, I got to say it's time to stop being polite and start being real. So tell me, do you do this? Are you an active trader? Should we start playing that old Kenny Rogers song, “The Gambler,” when you're around?

Andy Rosen: You can definitely play that song anytime.

Sean Pyles: It's a great song.

Andy Rosen: I love that song. It's a great track. But yeah, I mean, that aside, I'm not going to lie. I don't spend a lot of time pushing money around the markets. It makes me too nervous. I use a robo-advisor for most of my non-retirement investments, but I do have a small pool of money that I manage on my own in a brokerage account where I can experiment with concepts I find interesting. I find this valuable for work, again, just like I said, so I can learn about things that people I'm writing for might be encountering. But frankly, I do have a day job, and though trading is more relevant to my work here than it may be to someone listening at home, I don't think my bosses want me wheeling and dealing grain futures all day while I'm supposed to be reporting and writing.

Sean Pyles: Probably not. Yeah.

Andy Rosen: No. And I mean, I guess I'd have to give them a cut of it if I did it on their dime. So how about you, Sean?

Sean Pyles: No, I'm a super boring investor. I have automatic contributions from my retirement accounts pulled from my pay, and I have monthly direct deposits into a brokerage account, and that's about it.

Andy Rosen: Well, maybe by the time we finish up this series, you'll be a convert.

Sean Pyles: I highly doubt that, but I will try to keep my mind open.

Andy Rosen: OK, Sean. So knowing that you're going to keep your mind open for the next couple episodes, it's really important to reiterate here, when you learn about this stuff, it doesn't necessarily mean you're going to find out how exactly to do it by listening to one podcast. And certainly, it might not mean that it's a good idea for you. But again, I think it's really helpful to learn about this stuff to understand what your hopes and dreams for your portfolio might be, what you'd like to do if you had the chance.

Sean Pyles: It also helps you understand the full range of possibilities of things that you could be doing with your money. Where most people, like myself — I just have my 401(k), Roth IRA, I have a robo-advisor account, and I like keeping myself in this safe, small, little bubble because everything else seems so scary, but there might be other opportunities that I am actually really interested in that could help me grow more money.

Andy Rosen: Right. And another thing is it can be risky with a dollar, and it can be risky with a million dollars. So there are ways to experiment with this kind of trading, like we talked about paper trading where no money is on the line or very small investments with spare money to teach and potentially lose and get a sense for how it might feel to mess up because you're very likely to do so with these kinds of investments. It's just the statistics.

Sean Pyles: Right. But it'd be wise to not invest any money that you actually need to cover day-to-day expenses. That's always true. All right.

Well, Andy, can you please tell us what's coming up in episode two of this series on Next Level Investing?

Andy Rosen: Are you ready?

Sean Pyles: Oh, I don't know.

Andy Rosen: Well, next time we're going to venture into the dark and stormy waters of day trading.

Sean Pyles: No.

Andy Rosen: Yeah. Yes. Day trading has been around since the late 1990s. It was a big thing when it first came out, people making and very often losing thousands and tens of thousands of dollars in a day by making quick trades in the market. It faded a bit but never went away.

But recently, it's gained a new following with stock market influencers on TikTok, the commission-free trades that you can do on online platforms, and things like that. So we're going to explore the highs and lows of spending your day in front of a trading screen. Doesn't that sound exciting?

Sean Pyles: Sounds thrilling.

Andy Rosen: See you then.

For now, that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us with your questions at 901-730-6373. That's 901-730-N-E-R-D. Get it? You can also email us at [email protected]. Also, visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you're getting this podcast.

Sean Pyles: This episode was produced by Tess Vigeland and Andy Rosen. Liz Weston and I helped with editing. Chris Davis helped with fact checking. Kaely Monahan mixed our audio. And a big thank you to the folks on the NerdWallet copy desk for all their help.

Andy Rosen: And here's our brief disclaimer. We are not financial or investment advisors. This Nerdy info is provided for general education and entertainment purposes, and it may not apply to your specific circumstances.

Sean Pyles: And with that said, until next time, turn to the Nerds.