Is this considered day trading, active management or something else?

Question

I have been practicing with a few stock simulators for just over 1 year. My process for investing is to buy stocks when I see a significant drop in share price due to what seems like negative media around minor events, or just a down turn for an entire sector. For example, an established restaurant chain might drop 5% because a few franchises reported food poisoning. Or maybe a company drops 5% because it needed to perform a product recall due to manufacturing defects on recently sold products. Or maybe the entire healthcare sector went down 15% in just one week.

So I will buy at these times because I'm reasonably confident these companies will recover from these events within a 3 month time frame (some times it is just a few weeks), at which time I will sell.

Is this considered an actively managed portfolio? Or is it considered day trading?

I ask because people say actively managed portfolios typically under perform relative to the index. But in my simulators, I've achieved a 50% increase over the past 12 months, where as my passive investing portfolios only gives me about a 8% to 11% return. So this made me wonder if what I'm doing is considered active management? Or is it day trading?

Answer 1

What you are doing is active management. If you bought and sold positions in the same day, then you'd be considered a day trader. You use human judgment, not just a fixed criteria, to choose what securities to invest in. That is the definition of active management.

people say actively managed portfolios typically under perform relative to the index

This is a theory that applies to actively managed portfolios in general. It's somewhat based on the law of averages that if some investors perform below "the market", then others perform above "the market" in order to balance out. Plus, active managers typically pay more in transaction costs, which reduces their performance, making it harder to beat the market on average, and they want to beat the market by at least an amount that makes it worth their time to actively manage. Why settle for expecting 10% in an actively managed portfolio when you can expect 10% "for free" in an index fund?

Certainly individual investors can (and do) have portfolios that perform better than their benchmark. Whether your strategy can be expected to earn 50% consistently is yet to be seen.

In other words, you might have just been lucky that you have picked more winners than losers. It also makes a difference when you're using "real" money and not just a simulator. Are you willing to risk thousands of your own dollars on this strategy?

Answer 2

It's not day trading, because you hold the stock overnight. It is active management.

If you decide to do this with real money, start small and don't use capital that you cannot afford to lose. The markets are famous for strategies that work in the simulator and lose money in real life.

Answer 3

But in my simulators, I've achieved a 50% increase over the past 12 months, where as my passive investing portfolios only gives me about a 8% to 11% return.

The majority of free simulators are more like play money accounts. They do not simulate the market well. They let you trade at the last price and give you any amount of volume that you want to trade. The simulators at brokerage firms use real market data and replicate actual market conditions. They make you buy at the ask, sell at the bid and only give you trade executions if the volume of your porposed trade actually trades at your price on the market.

Since you use make believe money paper trading, it’s nothing like the emotions involved with real money, particularly when you're losing your hard earned money. You're more apt to hold on to a loser than you would have cut loose if you were a disciplined trader.

The major advantage of using a brokerage simulator is that it allows you to familiarize yourself with your broker's platform and services, reducing the chance that you'll 'fat finger' a bad trade when it's real money.

When you have achieve great performance on a simulator, take it with a grain of salt.

Answer 4

An actively managed investment fund is a fund in which a manager or a management team makes decisions about how to invest the fund's money. A passively managed fund, by contrast, simply follows a market index. It does not have a management team making investment decisions.

https://www.thebalance.com/actively-vs-passively-managed-funds-453773

Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index or target return.

https://en.wikipedia.org/wiki/Active_management

Day trading is speculation in securities, specifically buying and selling financial instruments within the same trading day, such that all positions are closed before the market closes for the trading day.

https://en.wikipedia.org/wiki/Day_trading

A fund manager engaging in day trading is a subset of active management.

If you aren't closing your position at the end of the day, then you aren't engaging in day trading. Arguably, you don't technically meet thebalance's definition of active management, as you aren't managing a fund. The Wikipedia definition doesn't as clearly restrict itself to funds, and can be considered to apply to you activities.

Another difference between the two definitions is that thebalance includes anything other than an index fund, while Wikipedia's definition says "goal of outperforming an investment benchmark index".

If a fund manager is choosing specific stocks rather than simply following an index, but they are choosing them on criteria such as low cross-correlation, rather than attempts at market timing, that would be "actively managed" according to thebalance, but arguably not according to Wikipedia.