This article originally appeared on Credit.com and has been republished here with permission.
In the wake of the Covid-19 pandemic, the world of retail investing has experienced a growing number of new arrivals looking to place their money in the stocks and shares that they believe in.
Emotional investments and allowing fear or greed to control decisions can lead to clouded judgment in the investing landscape. In these cases, it’s vital to look at the bigger picture–stock market returns may debate significantly in short-term waves. However, the historical returns for large-cap stocks can average 10% over longer-term scales.
(Image: Financial Times)
As the data above shows, increasing volumes of retail investors have led to unprecedented levels of option trading–with over 40 million contract calls being taken out in February 2021 alone.
(Image: Financial Times)
Despite more retail investors entering the market in the wake of the pandemic, the fluctuating trading themes in the chart above shows that many are still struggling to settle on a place where their money is best invested. Although ETFs have seen the largest volume of net purchases taking place over time, meme stocks, ESG stocks and growth stocks have all risen to the fore in recent months respectively.
The world of investing is a tremendously rich and diverse place, with countless opportunities for individuals to grow their wealth.
1. Avoid Falling in Love with a Company
One of the most significant issues that retail investors can face stems from allowing their emotions to control their decisions. They can make investments in a company with healthy fundamentals, experience impressive growth, and build too much of an emotional connection with their stock to pay attention when the fundamentals change and their holdings start to decline.
Keeping vigilant, and regularly zooming out to see the bigger picture can pay dividends when it comes to investing – particularly in companies that you feel yourself developing a rapport with.
2. Lack of Patience
On the flip side, it’s also vital to avoid falling out of love with your investments early, too. This can cause you to miss out on excellent opportunities simply by believing that you’ve arrived too late, or by getting fed up with waiting for the stock to move.
By adopting a more slow and steady approach to building your portfolio, it’s possible to yield greater returns over the long term. However, expecting a portfolio to do something that it isn’t prepared for is a path to disappointment. Remember to maintain realistic expectations for your portfolio growth and prospective returns.
As we saw in the above chart regarding the rather erratic investment patterns of retail investors, newcomers to the space may well be indulging in ‘over-trading.’
In February, Bloomberg ran an article warning about how ‘bored lockdown traders are a danger to themselves.’ Repetitive position shifting, or hopping from one position to another, is another sure-fire way to kill your profits. Significantly, transaction costs can significantly impact your bottom line – as well as the opportunities for sustainable growth you avoid through jumping out of the long term returns of your investments.
4. Choosing to Stay Loyal to a Losing Bet
The definition of insanity may be the act of doing the same thing over and over again and expecting different results, but in the world of investing, this can more appropriately refer to sitting by and watching your stock shed its value further and further whilst expecting it to eventually move back up.
“Behavioural finance calls this ‘cognitive error,’” explains Maxim Manturov, head of investment research at Freedom Finance Europe. “By not realising a loss, investors lose in two ways. First, they avoid selling the loser, which may continue to fall until it becomes worthless. Secondly, it is a missed opportunity to make better use of investment funds.”
“So, before you invest in a company, you should research the company and know how it operates,” Manturov adds. “You should also adhere to the principle of diversification to reduce the risks of individual sectors or companies and not allocate more than 5-10% of the portfolio to one company.”
As painful as it may be, sometimes, it’s a good move to sell your stocks in a company that’s continually falling. By cashing in your losses, you may be able to free up enough liquidity to invest in a stock with far better fundamentals.
5. Lack of Rebalancing
Rebalancing refers to the process of returning your portfolio to the target asset allocation as specified in your investment plan. Rebalancing isn’t an easy process because it can force you to sell an outperforming asset class and buy more from the asset class with the worst performance.
Because of this, rebalancing can seem like a counterintuitive move for newcomer investors. However, a portfolio that is allowed to drift with market returns ensures that asset classes can become overweight at market peaks and undervalued at market lows – resulting in poor performance.
The lack of rebalancing can hurt your portfolio in a similar way to sitting on losses whilst hoping for a change of fortune. By having the strength to sell your high performing asset class and to spend it on fresh, relevant investments, you can help to ensure the long-term sustainability of your portfolio.
6. Ignoring risk tolerance
Sadly, for many investors, it may be difficult to understand their risk tolerance prior to making their first investments. However, it can be extremely beneficial to listen to what your head is telling you during periods of severe volatility and building your portfolio around the level of risk you can cope with being exposed to.
Some markets are more volatile than others by nature, and this is particularly true of cryptocurrency investing – where the price of assets like Bitcoin have been known to rise and fall by as much as 50% over a matter of weeks.
With this in mind, it may be worth beginning your investment journey piece by piece, measuring how well you can respond to volatile stocks before placing larger volumes of your portfolio in them.
7. Practice patience
Finally, it’s imperative that new investors practice patience when making their first investments. With this in mind, it’s important to avoid letting greed control your decisions – and this can extend to buying stocks in which you’re expecting quick growth.
Markets can move in unpredictable ways, and external news events can cause market turbulence where none could’ve been anticipated. With this in mind, it’s important to remain patient with stocks that display good fundamentals but aren’t moving in an affirmative manner.
At its best, investing can be a wholly rewarding and engaging experience for individuals to grow their wealth through hard work and market insights. With these seven tips, it’s possible for you to begin your investment journey whilst giving yourself the best chance of finding your feet in the market as soon as possible.