Individuals around the world have become increasingly interested in managing their own investments due to the economic impacts of the COVID-19 pandemic. This is good news, to the extent that retail investors are prudently managing their money. However, all of us are prone to making various investing errors. In this article, we highlight some common mistakes and provide tips for individuals that want to begin investing their hard earned cash.
Lack of Adequate Financial Planning
Many individuals know that they want to invest, but also have very little free time to conduct their own research and analysis. Furthermore, many are unaware of the professional services available to them, or are unwilling to pay for such services. This can be a recipe for disaster. We strongly recommend that any individual interested in investing their own hard earned money should study basic investing and valuation techniques before getting started. This requires more than
For those that would rather leave it to the pros, it is worth considering one of the leading robo advisors. These services charge a fraction of the management fees of a traditional financial advisor. Furthermore, some robo platforms even offer attractive promotions to new users, which effectively lowers the cost of their services. Even those skeptical of paying for investing services may want to consider that using a trusted robo advisor is a more sound strategy than haphazardly investing or simply following the latest trend in the news.
Incorrectly Attempting to Time the Market
Some retail investors think that they can "time the market", or buy stocks when the market as a whole is temporarily down. While this type of approach does appear to follow some basic logic (i.e. buy low, sell high), this type of speculation is not truly an investing strategy. Instead of researching companies and analysing their financial performance, market timing relies on the often mislead notion that the individual can predict the short-term movements of the market. While you may be able to predict movements once in a while, very few are able to do so consistently. Therefore, you stand to lose money by randomly guessing, rather than conducting your own thorough analysis.
Falling Victim to Shortsightedness
Market volatility can make investors lose track of their long-term objectives. In some cases, individuals will be scared off by sudden drops and will panic, sell their shares, and lose money. For example, on March 16 the S&P 500 dropped 11.98%, the third worst day ever in percentage terms. However, unless you were planning to sell in the near future, this kind of drop should not be as worrisome as it may have seemed back in March. In general, the stock market has performed very well over the long-term. Therefore, most retail investors should not get caught up in short-term losses.
Along the same lines, the market has sustained even longer downturns (see the chart below for 2008), so it is important for investors to keep in mind that they should expect ups and downs in the stock market. The most risk averse individuals may want to consider other types of investments, which offer lower rewards without as much risk, such as government bonds or even high yield savings accounts
Settling for an Online Brokerage with High Fees
If you buy and sell securities online, it is important to be aware of the cost of these transactions. Traditionally, some online brokerage companies have gotten away with charging exorbitant fees. However, thanks to increased transparency and competition, many now charge much lower fees than their competitors. For new and experienced retail investors alike, we recommend reviewing the fees of your current brokerage with the most affordable options available, to make sure that you aren't being taken for a ride. Not convinced? Consider this, the average minimum fee per trade is twice that (S$20) of the leading brokerage (S$10, Saxo Markets) in ValueChampion's review. This means you might be twice as much as you need to!
Keep a Balanced Approach
The best way to invest is through proper planning. If you want to invest on your own, this means getting up to speed on investment strategies and conducting thorough analyses. If you plan to pay a professional to manage your money, make sure you understand how your portfolio will be constructed and that your incentives are aligned with your advisor. We also recommend reviewing the fee structure of several advisors before handing over your funds. In short, your financial strategies shouldn't change drastically during an economic downturn. The best way to survive during a bull or bear market is through prudent planning, rather than implusive or speculative decision making.