March 2020 had investors’ hearts in their mouths. Far from terrifying a new generation of young professionals to hide their cash under their beds however, many saw it as an opportunity to get into the stock market.
Driven by boredom and (to a degree) enabled by financial initiatives like JobKeeper and JobSeeker, there has been a boom in white-collar workers (both in Australia and abroad) using free trading apps like Robinhood and CommSec.
With many taking cues from internet forums and entertaining (if questionable) influences like Dave Portnoy (the founder of Bar Stool Sports and cocky day trading livestreamer who has been quoted saying, “I’m not saying I’m smarter than Warren Buffet… But I probably am”) and some even getting used to using the ASX or NASDAQ as a replacement form of gambling while COVID briefly had professional sport on hold, “an army of day traders” has been created, Bloomberg reports.
Of course, there have been some hair-raising failures, with couch potato day traders losing big bucks on silly share punts. But there’s also been a lot of success stories. Generally speaking, for those that got in after the March crash, the ASX and NASDAQ have been (relatively) friendly, thanks to governments artificially propping up their economies (a ‘stealing from the future’ phenomenon some say could have dire consequences, and others believe will simply tail off gradually as the ‘real’ economy comes up to meet the market, without too many negative effects).
The upshot? There is now a large community of overconfident new day traders and weekend warriors. Sound like you? You’ve now got two options: get chewed up and spat out, or continue growing your earnings in style. If you’re hoping for the latter, you might like to listen to the following gems of advice for rookie investors, courtesy of a selection of financial experts and advisors.
AMP Financial Advisor Andrew Heaven told DMARGE that a failure to research is a common mistake new investors make.
“Make sure you do plenty of research on what types of investments are right for you… there are countless tools online with information on how to best enter the market, what to invest in and how to ensure you’re investing in something that aligns with your values and also financial goals.”
Knowing what you’re trying to achieve is also crucial, he relates.
“Regardless of whether you’re investing for the medium or long term, you need to be ready to commit to that timeframe. If you invest more than you can afford, you’re not being realistic about your goals and your cash will be tied up – meaning you’ll find yourself short when budgeting for your day-to-day life.”
“If you know what you’re trying to achieve and why, you’ll be less likely to wander off in a different direction or get distracted by short-term changes and volatility.”
Another common error (albeit maybe not the main one this new generation of eager rookies are making) is waiting until you ‘have the money’ to invest.
“It’s often thought that for investing, in general or for specific assets, you have to have a large chunk of money but everyone needs to start somewhere,” Heaven continues, “it’s important to note that a lot of people make their money by investing smaller amounts.”
“In 2020, it’s now easier than ever to enter the stock market without a lot of capital. Young people and those looking to get into the market don’t need to have huge piles of cash, and can look to get started by making use of a fractional investment platform, which can get you started for as little as $5.”
Heaven also advises rookie investors don’t fall into the trap of blindly following the crowd.
“Next time you hear a friend or family member talking about their next ‘big investment’ take a moment to remember that everyone is in a different financial position and on a different investment journey.”
“While the investment opportunity might sound fun and exciting, and your friend may sound very convincing and educated, take a moment to remember your financial goals and individual situation before jumping in.”
Those with a little more experience under their belts tend to make the opposite mistake in trying to be too clever: “one of the most common mistakes is trying to outsmart the market and predict falls and peaks.”
“While some investments might be easier than others to predict success, and we’d all love to outsmart the market by trying to time entry at that perfect, sweet spot for positive gains, it’s very difficult to do so. Doing your research and investing what you can afford, will leave you in a far better position than spending hours trying to ‘beat’ the market.”
On a recent episode of The BIP Show podcast, James Whelan – Investment Manager at VFS Group in Sydney – divulged another common error rookie investors commit: being tempted into making lots of little punts.
“You duck down to Ryan’s Bar, catch up with your mates, they say, ‘I’ve got a red hot tip for you Jimmy, you’ve got to get onto this one… they’re in Sierra Leone and they’re digging ants out of copper mines.”
“It’s just the biggest load of baloney… [but] you do a cursory look and purchase.”
“It’s the worst possible idea – you don’t know anything about it, you’re not that close to the company, it’s probably going to be a terrible idea anyway and there’s every likelihood that… on the other side of it someone is just selling into your buying.”
“If you’re not close to it, don’t even worry about it – at the small end of the scale.”
“It’s easy to keep up with what the HP’s are doing or CBA, Apple or Amazon because it’s in the news and it’s well disclosed. But the worst mistake you can make is to have a whole shoebox full of these [speculative] pieces.”
Another common faux pas is not cutting your losses. To help you have the confidence to do this, Chris Weston, head of research at Pepperstone, on the same podcast episode, said it’s important to understand position sizing.
“Everyone comes on board, they start trading FX markets or indices and all they’re focussed on is entry points.”
“[You see] signal services and all that nonsense advertised every day of the week on Youtube and it becomes completely infuriating.”
“Every time you go onto Facebook there’s a signal service trying to be pumped out – that’s not trading.”
“Getting into the market is about 10% of trading,” Weston said. More importantly: “you’ve got to get correct position sizing for the right size of your account. You’ve got to understand where your stock loss is, how much risk you’re taking, and understand what sort of reward you need to be taking from that.”
In other words: it’s not about obsessing over your win-loss ratio, but getting enough winnings from your wins (and not losing too much from your losses). In fact, some of the most successful traders have a 60% loss rate, but the amount they win vastly offsets them.
“A 40% success rate can still make you money [if you cut your losses correctly].”
Weston told The BIP Show this is a mistake he sees “time and time again” at a retail level.
According to Weston, it comes down to pure ego: “[many people] have made money in property, done well in life, run a successful business, etc. [Then they] start trading…”
“Human beings have been bred to be right [so they] will start making a loss on a position and continue holding that position.”
“There’s a saying: ‘professional traders go broke taking small profits, retail traders go broke taking massive losses.'”
“That is the number one reason I see people blowing up their accounts.”
“You don’t always have to be right – the notion you can accept a [small] loss and move onto something else is what trading’s all about.”
“You need a process.”