By Simon Crookall, Founder, InvestEngine
The COVID-19 pandemic and lockdowns had many implications for investors. Arguably at the forefront was a boom in interest in the stock market, triggered by widespread increases in free time and disposable income and spikes in volatility.
At the same time, online and app-based investment platforms, with their low costs and ease of access, are helping to overhaul the investment space. An area previously reserved for the wealthy or professionals is now open to even the most inexperienced user to access the potential of the stock market.
A risky game
As a result, trading apps have seen a huge surge in sign-ups. However, this surge has also brought with it a new wave of investors – many of whom are being drawn into the pitfalls of approaching investing like gambling, rather than taking a long-term, considered view.
Entering the stock market without a plan or sufficient knowledge of investments, newbie investors are often unwittingly taking on too much risk, making investment decisions based on social popularity, and placing too much emphasis on individual shares.
These concerns have been echoed by the Financial Conduct Authority (FCA) — highlighting the dangers of high-risk investments like cryptocurrencies and foreign exchange, which younger investors may be accessing with investment apps.
A lack of understanding around such investments, means many young people find themselves making losses that they can simply not afford. In fact, 59% admitted that significant investment losses would impact their lifestyle.
So what steps can investors take to ensure they are investing better?
Invest on your terms
Before parting with hard-earned cash, it is key for investors to understand what investments may be right for them. The level of risk they can afford to take, how long they can invest for, what their goals are and how much time they have to dedicate to investing can all influence how an investor should approach their portfolio.
Plan to play the long game
What’s more, this understanding will be critical in keeping investors motivated and disciplined to stay the course for the long term, even (and especially!) when stock markets get rocky.
The reality is that, in the short term, stock markets are pretty much as likely to fall as to rise. But with a properly diversified portfolio, the longer you invest for, the more chance you have of making a profit – and beating cash returns.
It can be tempting to invest in stocks that are soaring in value – especially when everyone else is. But such investments are risky, especially if they don’t fit your plan, and can crash as quickly as they rise.
GameStop, for instance, saw its share price skyrocket as a result of a Reddit thread, inviting a stampede of novice investors. The stock’s inevitable crash resulted in the destruction of US$30 billion of on-paper wealth – with many small-time investors at the heart of this loss.
Investors should carefully consider their personal risk tolerance, which is different for everyone, and invest only at a risk level that feels comfortable to them.
Diversification is key
Having some money in volatile individual stocks may be desirable for some, depending on their risk tolerance. But it’s always a good idea to balance that with more traditional, stable investments. Similarly, diversifying investments across asset classes and sectors will help smooth returns and reduce risk, ensuring that investors aren’t overexposed if a single holding crashes, or too reliant on just one investment providing returns.
Know when to leave it to the experts
Some people prefer to be in control of their investments – but it’s not for everybody.
For those that would like more guidance, the reassurance of knowing their money is in the hands of an experienced professional, might be the way to go. Thankfully, these days, professional management can be just as accessible and affordable as trading apps – so there is no need to compromise.