Volatile shares make life tricky for newcomers

VOLATILITY in shares this year has left experienced investors dizzy so spare a thought for 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 concern was that “people are jumping in blindly without any form of strategy”.

“Remember 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 recently warned of the dangers of trying to time the market in periods of volatility, amid a large increase in trading activity by small investors.

ASIC said people chasing quick profits by playing the market over the short term had traditionally performed poorly.

Some new investors ask the wrong questions, such as:

1. 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.

2. Is it too risky now?

There is always risk in stocks, and Mr James said the risk 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.” 3. 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.” He 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,” Mr James said. “You are not doing this for the returns you get today – you are doing this for the returns in five years.”

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.