Volatility in shares since February has left many experienced investors dizzy, so spare a thought for stockmarket newcomers.
News.com.au reports that 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.”
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.
This article appeared in the Herald-Sun and news.com.au and also features commentary from MBA Financial Strategists.