TOP 10 TIPS FOR INVESTORS NEW TO THE GAME
▶ Amateur traders are advised not to fall for hot market trends but to study company fundamentals, writes Deepthi Nair
Sharjah resident Karan Gurnani may have only been trading for a few years, but already he has accumulated a solid following of 870 investors who “copy” his trades on online trading platform eToro.
The retail investor, who is still only in his mid-20s, learnt about investing by reading books, annual reports and the financial statements of companies in which he is interested.
“Some great investors I like to learn from are Mohnish Pabrai, Joel Greenblatt, Guy Spier, Howard Marks, Warren Buffett, Ryan Cohen and Charlie Munger,” says Mr Gurnani, who has a degree in finance from the American University of Sharjah and a CFA level 1 qualification.
He also hosts a YouTube channel, which currently has about 1,500 subscribers, on which he shares the knowledge gained from his investing journey.
The young investor, who dabbles in the shares of companies such as Twitter, Pershing Square Holdings and Chinese agriculture-focused technology platform Pinduoduo, does not believe in day trading.
Instead, he leans towards the ideology that behind each stock is a business and if you buy good businesses at fair prices, the stock will tend to follow.
While admitting that he has learnt from mistakes in the past, Mr Gurnani says novice investors must be careful about fees as they can eat away long-term portfolio gains. “Make sure to go through the fine print and check for hidden fees at the brokerage you are investing with or built into an investment product,” he says.
Financial experts have rounded up 10 tips for beginners who find it intimidating to trade in stocks. Experts suggest that 20 per cent of your monthly income should be allocated to investing. Here is how to get started:
1 Start now
The best time to invest in stocks is now and, contrary to popular belief, newbies do not need a lot of money to get started. Compound interest will help to transform their small investment into a consistent amount of wealth over time.
“If I put $10,000 now into a savings account and add $1,000 each month, over a period of 30 years, that’s a total contribution of $370,000,” says Mark Chahwan, co-founder and chief executive of robo-advisory investment company Sarwa. “If instead I was investing this money, with compounding, this $370,000 gives me more than $1,200,000 considering an average return of 7 per cent a year.”
However, don’t invest money you cannot afford to lose, warns Paul Jackson, global head of asset allocation research at Invesco. “Stocks can be extremely volatile and if you need the money in a hurry, then you may need to sell at disadvantageous prices,” he adds.
2 Consider age and time span
A general rule suggests subtracting an investor’s age from 120 to know the percentage of your portfolio to invest in stocks. “Equities are risk assets and people near their retirement age are not advised to park a significant sum in stocks,” says Vijay Valecha, chief investment officer with
Century Financial. “The reason being, bear markets can on an average bring about 30 per cent correction.”
Or if there is significant financial expenditure such as marriage or a house purchase planned in the near term, the amount invested should be much lower, he suggests.
3 Spread your risk
Newbie traders must be careful not to put all their eggs in one basket, or in one company in the case of the stock market.
“If that company goes through a tough time, that’s going to seriously hit your nest egg,” says Laith Khalaf, financial analyst at AJ Bell. “By investing in a pooled fund, investors can achieve diversification across a range of assets and companies.”
4 Do not get emotional
Amateur traders are advised not to fall for fads or a hot market trend as they are likely to incur losses.
“Investors should focus on the long term, looking beyond the latest headline or breaking news,” says Mr Chahwan. “Markets are volatile, this is their nature. But the global economy trends upwards over the long term and rewards patience.
“Block any noise and don’t get tricked by how the market is performing today, tomorrow or even this month. It distracts you from making money long term.”
Investors must also determine whether they are disciplined and able to withstand losses or are extremely reactive.
“If the latter, then they may need to develop disciplines that prevent them from trading too much, which brings the double penalty of high implementation costs and the risk of selling low and buying high,” Mr Jackson of Invesco says.
Instead, new investors should read through a company’s financials and check if their revenues and profits have risen for the past 10 years, Mr Valecha says. Financial data is available free of cost on sites such as Yahoo Finance, Google Finance, Finviz and Koyfin, he adds.
5 Gauge your appetite for risk
Risk management is the most critical trait needed for a beginner in the stock market.
“If you invest in the stock market, you will see the value of your investment fall regularly,” says Mr Khalaf. “This is simply how the market behaves, it goes up and down, although the long-term trend is upwards.”
So beginners must be willing to sit tight when markets fall or they might end up selling out when markets are low and buying back when they are high, thus eroding long-term returns.
A simple risk management strategy is not allocating more than 5 per cent of the portfolio to a single investment, according to Mr Valecha.
6 Consider passive funds
This asset class is great for novice investors as they park money into a global tracker fund, which follows the performance of the world stock market, Mr Khalaf says.
“These funds simply track an index, which makes them simple and they’re a low-cost way to invest, typically less than 0.1 per cent per year”
7 Control your costs
Fees are an unavoidable part of investing, but investors must ensure they do not chip away at portfolio returns. Keep investment fees below 1 per cent, Mr Chahwan says.
“Approximately 1.15 per cent in additional fees can destroy 28 per cent of wealth,” he adds.
The co-founder of Sarwa suggests opting for low-cost funds to keep a lid on investment fees.
8 Invest regularly
Investing on a regular basis rather than a lump sum investment can help you become a more disciplined investor.
By putting money into the stock market gradually, investors can mitigate the risk of putting in a large lump sum just before a big market fall, says Mr Khalaf.
“A systematic investment plan whereby an investor puts in regular payments into the trading account will help in averaging out the costs on a monthly or quarterly basis,” Mr Valecha says. “Timing the market is extremely tough.”
9 Focus on your values
Beginners can choose a set of principles to guide their investments. For instance, they can opt for growth, value, a combination of the two, or yield, “but whatever it is, identify it and stick to it”, Mr Jackson of Invesco says.
“The market will do its best to shake your beliefs. Momentum investing may feel comfortable but is a costly exercise due to the high turnover,” he adds.
10 Seek professional help
Investors who find it tough to understand financial markets should seek help from a licensed professional operating under a regulated financial entity.
“In the UAE, companies operating in the financial market are regulated by the Securities and Commodities Authority,” Mr Valecha says. “A market consultant will help beginners navigate the intricacies of the stock market.”