Today, anyone with an Internet connection can obtain real-time information about stock prices that makes trading look easy. And many day traders are buying into this, making rapid, large-volume trades themselves.
You may think these investors are only hurting themselves when things go wrong, but your investments can be affected, too. In fact, day trading can increase stock-market volatility, driving prices to astronomical heights one day and sending them freefalling the next.
Managing purchases and sales can be difficult when the market is moving quickly, and these dramatic shifts can be seriously disruptive for mutual-fund portfolio managers, who typically establish positions for longer terms.
To try to manage volatility, portfolio managers may need to keep more cash on hand for emergency purchases, and may need to sell a security before its ideal time.
Regardless of how talented or seasoned a portfolio manager is, it’s difficult to protect a mutual fund completely from market turbulence caused by day traders. But mutual funds are still great additions to your portfolio: Over the long term, investing in a mutual fund may actually minimize swings in the market.
How? Mutual funds offer diversification that may help lessen the impact of market highs and lows. Additionally, because mutual funds tend to hold securities for long periods of time, they may be better equipped to ride out violent intra-day market swings.
If you – unlike the day traders – are in it for the long term, your mutual funds can be a calming influence in a turbulent market.