Are you a stockholder or a stocktrader? (Part IV)

Stock Market Investing - Diversification or Income Source?

Let me just define some terms, I'd like to lump the stock market investor and the stock market trader into one term which I'll call a stock market participant just so that I can differentiate the investor from the trader.

Some people are lured into the stock market because they think it's fast money. It's just that mentality that makes people think the stock market is nothing more than a gambling house. Am I making a case for everyone to be investors? Of course not. Sometimes being an investor means that your capital is stuck on stocks that are not appreciating. As a prudent person, you wouldn't want your money in something that's not earning.

What I'm trying to do is to force a person to focus on what he really wants from the stock market. You have to define if you are looking at investing in the market to diversify your asset base, or primarily for income source. You may be thinking, what's the difference?

Well the difference will come out when you start looking for

What stocks to buy
When to buy stocks
How long you will hold on to them
When it's time to say goodbye

Worldwide, it's generally viewed that to create wealth, you invest in two things -

Real Estate
Stocks

This does not take away the importance of being in business - whether through being an employee or a business owner. But the above two are the instruments you use to multiply your wealth even further. Unfortunately, this has a very Western and modern economy point of view. Ours, admittedly, have been more of a boom and bust economy. We haven't had an economic growth stage that spanned more than 10 years. Hopefully, this time around, we'll buck that trend.

The consequence of that is that we shouldn't be holding on too long on either of the two. But this is more pronounced for stocks. Real estate prices will always have their highs and lows themselves, but unlike stocks, it won't go down below the cost of purchase (unless in special crises like the Asian Financial Crisis).

More to follow.