Most people make the mistake of assuming that if you’re good at online trading, you’re automatically going to be good at wealth management as well. That is not necessarily true and through today’s article, I will be referring to the five most common similarities and to the five most common differences between trading and managing your wealth. Please note that this article comes from the perspective of someone who is the managing partner of a China fund, a fund aimed at Westerners who are interested in gaining exposure to Chinese assets.
Let’s start with the similarities.
In both cases, you make money by making financial decisions. You have to decide what to invest in, when to buy and when or if to sell (whether we are talking about Chinese assets or anything else). From this perspective, online trading and wealth management are remarkably similar.
In both cases, psychology plays a very important role. You have to be very strong from a psychological perspective to do well as a trader as well as when managing your wealth. Not giving into peer pressure by buying when everyone is buying and selling when everyone is selling, being brave what everyone else is afraid in order to take advantage of opportunities and so on. Words can’t begin to describe how important psychology is when it comes to both dimensions, something just as true for China (my area of expertise) or any other jurisdiction.
When it comes to both, you are your biggest enemy. Being a good trader and being good at managing your wealth is ultimately all about overcoming your weaknesses as a human being… whether you are from the US, China or Germany. All about knowing how to control your decisions, how to control your for your fear and so on. Ultimately, it’s all a matter of not becoming a victim of your own emotions and from this perspective, it’s easy to understand why you are your biggest ally as well as your biggest enemy.
Both seem easy enough on paper but are actually extremely difficult. Unlike flying a plane for example, most people think they can be good at trading as well as good at managing their wealth. However, achieving good results is easier said than done. Trading as well as wealth management are things which seem remarkably simple on paper but in fact, most people fail.
Wealth management as well as trading can and should be fun. They may seem let’s say boring at first glance but once you dig a bit deeper, I’m sure you’ll end up coming to the conclusion that they are quite fascinating. In fact, to do well, it’s almost a requirement to love what you’re doing. Otherwise, other people, who actually enjoy creating or managing their wealth, will have an edge over you.
Now, let’s move on to the differences:
You will have significantly more transactions when trading. This is perhaps the main difference between creating and managing your wealth. As a trader, you buy and sell on a regular basis. This can often mean having multiple transactions each day or when it comes to high-frequency trading for example it can mean having multiple transactions per second.
Trading is an occupation, whereas wealth management is more of a necessity, something each and every person does, whether they realize it or not. Some people are musicians, some people are sculptors, other people are traders or designers and so on. Trading is an occupation, just like many others out there. If you don’t like it and if you don’t want to do it, simply do something else. Wealth management on the other hand is something each and every person does, again, whether they realize it or not. If you do nothing more than keep your money in the bank, then there you have it: this is the wealth management decision you have made. When buying a home, you are once again making a wealth management decision, regardless of whether or not you acknowledge this fact.
Trading tends to be considerably more stressful than wealth management. You may not realize it, but making lots and lots of financial decisions each and every day tends to get the best of you. Therefore, it’s important to understand that not everyone can be good at trading for the simple reason that not everyone is capable of withstanding the pressure associated with this occupation, especially in tricky jurisdictions such as China.
Trading is for the most part riskier than wealth management. Since you’re engaging and lots and lots of transactions and want to be profitable at it, you are also taking risks more often than someone who simply manages his wealth. Also, in order to let’s say earn a living as a trader, the returns in question need to be quite impressive. For this reason, traders tend to be considerably more risk-tolerant than people who are simply managing their wealth.
Not everyone can become a good trader, whereas each and every person is perfectly capable of doing a good job managing his wealth, whether they living in China or a Western nation. As I’m sure I’ve made clear by now, trading tends to take its toll on you. Some people are naturally more suited for such occupation types whereas other people are not necessarily a good fit for trading. On the other hand, managing your wealth is an entirely different story and each and every person has more than enough things working in his favor to do well.