Ally’s image shows stock charts on a mobile device with the title “Trading and Investing 101” and a Weekly Viewpoint tag in the top left corner.

If you’re feeling stuck in the middle of a speculation frenzy, you’re not alone. Stock picking isn’t for everybody, and you need strong nerves to survive.

Hot stocks like Tesla, Nvidia and FAANG plunged on Thursday, dragging the S&P 500 more than 2%. On the other hand, meme stocks’ wild gains made headlines. Talk about a divided market.

Graph titled “A Market of Stocks or a Stock Market?” depicts daily moves in the S&P 500 versus FAANG (Facebook, Apple, Amazon, Netflix and Alphabet/Google) stocks from January 5 through February 25. They followed the same general track with the largest difference being in mid-January with the S&P 500 just under 2% and FAANG stocks at about 6%. Otherwise, in this timeframe, the S&P 500 tended to range from 2% to –2% and FAANG stocks tended to range from 4% to –4%.

Luckily, you don’t have to be a trader to take part in the market these days. There can be value in thinking long-term or putting your money in a broad bucket of stocks and assets in hopes it’ll grow over time, as history has often shown.

So what are you? A single-stock trader or a long-term investor? Or a combination of the two, perhaps?

Don’t worry, there’s no right or wrong answer, and of course you can switch your answer at any time. But there are some things you need to consider.

Here’s the 101 on trading vs. investing.

Trading 101

Stock Picking

Single-stock trading can be a fun, intellectual challenge. Sometimes, a company’s share price can become unmoored from what the company is worth based on its financials. If you recognize that, you may be able to opportunistically buy or sell stock to take advantage.

That’s called stock picking, and it’s what most people think of when they hear about Wall Street traders. It’s not too far off, either. Legendary investors such as Warren Buffett and Peter Lynch have made names for themselves from their stellar stock picking.

Even if you’re not a stock whiz, you can still use single stocks to support an idea you’re excited about. Your beliefs could pay off over time, even if you’re not up for short-term trading. Look at Apple: If you invested $100 in its 1982 public offering, you’d have over $100,000 today!

The Concentration Risk

Single stocks can come with concentration risk, though. If all your eggs are in one company’s basket, you could lose money quickly if the company stumbles. Single stocks are also vulnerable to larger environmental changes, such as a sudden rise in yields (sound familiar?).

Stock picking isn’t easy, either. Even the great Warren Buffett takes some heat because of selling too soon, as he did with Delta back in April.

It can take a bit of luck. You might’ve heard about all the tech darlings that crushed the market last year. But what you didn’t hear much about were the slew of stocks that ended up doing poorly. Last year, about 63% of all stocks in the Russell 3000 returned less than the index, and about 20% fell 20% or more during the year.

You may be more exposed to market events as a single-stock investor, too. Individual companies can go through bankruptcies and acquisitions. Single-company shares are also more prone to behavioral phenomena such as momentum-based swings and short squeezes.

Investing 101

The Broader View

If stock picking isn’t for you, don’t fret! Many people don’t trade their way to wealth. Instead, they build out a diversified portfolio, then wait several years for compounding to do its work.

It’s commonly called the “set it and forget it” method, since long-term investors usually don’t bother themselves with the day-to-day noise of the market. They just make a plan and stick to it.

If you want a piece of the stock market instead of just one stock, there are plenty of exchange-traded  funds (ETFs) that could give you exposure to sectors and indexes. Buying the entire market has historically been a good trade, too. The S&P 500 has posted an average annual return of 8% since 1950, despite having gone through 10 declines of 20% or more.

Chart titled “The Market’s Resiliency Throughout History” depicts the S&P 500 from 1950 to 2020, highlighting the 10 bear market periods during that time. Bear markets are 20% drops after a 52-week high. On a logarithmic scale, the S&P 500 rises from just above 10 to just under 10,000 — a clear upward trend.

Investing doesn’t have to be boring, either. Many S&P 500 funds are cap-weighted, so they offer decent exposure to stocks like Apple and Tesla. They also give you exposure to often-overlooked sectors like energy and financials that can help soften the blow when other parts of the market are selling off.

The Waiting Game

Long-term investing requires mental strength. You have to tame your emotions and stick to your plan even when stocks are falling. That sounds easy until you face a market like the one we saw a year ago, when the S&P 500 fell 34% in a month before making its way back up.

Buying and holding tends to work better with a long-term outlook. The stock market can go through inexplicable rallies and drops, and you have to adjust your expectations accordingly.

Think about this: The S&P 500 took five and a half years to recover its losses from the Great Financial Crisis. Some people can wait that long, but others may need their money before then. If you have a shorter horizon, you may want to think twice about investing solely in stocks.

Some investors like the action of the market, and a “set it and forget it” strategy may not scratch that itch. It’s also not the most exciting strategy to talk about at Zoom dinner parties.

The Bottom Line

Today, it’s more a market of stocks than a stock market. That’s caused some serious swings and air pockets in certain sectors. While there’s nothing wrong with trading single stocks, you need to know what you’re dealing with. Trading just because it’s the hot thing to do may not be the best approach.

The key? Remember the game you’re playing. You have different wants, needs, goals and money constraints than everybody else, so it makes sense that your portfolio would look different, too. Only you can pick what’s best for your situation.