A. Generally, if we exclude those short term traders, we can put investors into two categories: active investors and passive investors.
An active investor is always busy, because he or she wants to study many different factors that impact the stocks he or she wants to invest.
Just imagine the list of factors active investors need to check out -
They probably will start from the macro economic conditions, will Fed raise the rate next month? Would China's devaluation of currency hurt our economy? What's the impact of gold's collapse? Which sectors will benefit from the rising rates? Which companies are best positioned in those improving sectors? Should we invest in the leader anticipating it will continue to lead, or a laggard anticipating a turnaround? How much cash does this company have right now, will generate next year? What is the PE today and the historical level? Does the recent dip of the price provide a good buying opportunity or indication of time to bail out? ...
In other words, an activate investor is someone who is energetic, confident on his or her macro and microeconomic research skills, and has good if not perfect marketing timing capabilities.
If you feel the above sound like a daunting task, which it is, maybe you want to become a passive investor.
Passive investor believe they couldn't predict the future, they make investment decisions based on historical long term records, they want to diversify to reduce correlation risks, they study their risk tolerance levels and design portfolios that match the risk tolerance levels, they rebalance periodically, then off pursuing things more interesting in their lives.
The Bottom Line
The bottom line is, passive investors tend to do well over the long term, despite short term fluctuations. Active investors work very hard, with nothing guaranteed, even for the long term.
What kind of investor do you want to be?