Volatile shares are a trap for new investors but still they come
New investors have been entering the stockmarket in droves but their enthusiasm might end with a nasty financial hit, according to shares specialists.
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Volatility in shares since February has left many experienced investors dizzy, so spare a thought for stockmarket newcomers.
New investors have rushed into stocks during the pandemic – online broker nabtrade reports a 360 per cent jump in new accounts – and investment professionals are concerned bad decisions will hurt them.
Behavioural economics specialist Ted Richards, from online investment group Six Park, said the worry was that “people are jumping in blindly without any form of strategy”.
“Remember that no one has a crystal ball, so your investments need to be diversified to protect against the level of uncertainty in the future,” he said.
The Australian Securities and Investments Commission last month warned of the dangers of trying to time the market in periods of volatility after it found a large increase in trading activity by small investors.
It said people chasing quick profits by playing the market over the short term had traditionally performed poorly.
Some new investors are asking the wrong questions, such as:
What’s a great stock to buy?
One stock is not an investment strategy. It’s a gamble.
“People are looking for hot stock tips from friends and neighbours,” Mr Richards said.
“Often they’re investing in businesses they know very little about. This type of approach is more like throwing darts blindfolded than investing.”
MBA Financial Strategists director Darren James said initial hopes of a quick COVID-19 market rebound had faded.
Has the market reached the bottom?
“You are never going to get it right in terms of trying to pick it,” Mr James said.
“If you have a long-term view, regardless of when you get in, you are getting a better price than 12 months ago.”
Mr James said some investors had switched from shares to cash during the recent plunge and now wondered whether they should get back in.
“It’s often harder to pick when to get back in,” he said. “You are not doing this for the returns you get today – you are doing this for the returns in five years.”
Is it too risky now?
There is always risk in stocks, and Mr James said it was arguably lower after markets had fallen.
“Some people were going to put money in prior to COVID hitting, but now they have stopped,” he said.
“You could argue there was greater risk back then because the market had been going so well for so long.”
Mr Richards said that rather than ask about specific stocks or timing, new investors should think about their investment time frame, their ability to sleep at night if stocks fell hard, longer-term goals, and how to diversify through index funds.
TIPS FOR NEW INVESTORS
• Keep market losses in perspective – investors only really gave back what was gained over the previous 12-18 months.
• Look at the bigger picture and don’t let emotions get in the way of sensible decisions.
• Don’t confuse skill and luck. If someone that recently made money on a speculative stock, chances are it had more to do with luck.
• Be well diversified across industries, asset classes, and geographies.
Source: Six Park
Originally published as Volatile shares are a trap for new investors but still they come