Paul's Insights: Chasing a quick buck sees investors lose money
The concern is that this burst of activity coincided with one of the most volatile periods of our sharemarket’s history. I could understand if these first-time investors were buying stocks when values where down as part of a long term plan. But ASIC’s research suggests that’s not the case. Plenty of newly minted investors held onto their shares for just 24 hours, sometimes less, in a bid to profit from short term market movements.
Trying to time the market through short term trades is difficult at the best of times – even for professionals. Add in an extraordinary level of market turbulence and it’s even tougher. Not surprisingly, many of these recent share investors didn’t enjoy much success.
ASIC’s data shows that on more than two-thirds of the days between February and April when retail investors were net buyers, their share prices fell the following day. For more than half the days on which retail investors were net sellers, their share prices increased the next day.
As ASIC points out, for retail investors to attempt market timing in the current uncertain environment, is “particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families”.
Buying quality shares when values are low makes sense as part of a long term strategy. Aiming to turn a quick buck through market timing can be a recipe for financial disaster. Chances are the only one who comes out on top is your broker.
At times like the present, when there is so much happening with COVID-19, jumpy markets, and a big shock to the global economy, it’s especially important to keep investing simple. Having a mix of investments, adding to those investments systematically over time, and taking a long term approach are steps we can all take. And it’s a far more proven recipe for making money than trying to time markets.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
During this period, close to 5,000 Australians signed up each day to invest in shares for the first time, which was 3.4 times higher than the normal average. This surge coincided with one of the most volatile periods in the sharemarket's history, likely attracting new investors looking to capitalize on market fluctuations.
Trying to time the market for quick profits is generally not advisable, especially during volatile periods. Even professionals find it challenging, and many recent investors who attempted this strategy did not succeed. It's often a recipe for financial disaster.
ASIC warns that attempting market timing in the current uncertain environment is particularly dangerous and likely to lead to heavy losses. This is especially concerning as these losses could not happen at a worse time for many families.
During volatile market conditions, it's recommended to keep investing simple by having a mix of investments, adding to those investments systematically over time, and taking a long-term approach. This strategy is more proven for making money than trying to time the markets.
ASIC's data shows that on more than two-thirds of the days when retail investors were net buyers, their share prices fell the following day. Conversely, on more than half the days when retail investors were net sellers, their share prices increased the next day.
Buying quality shares when values are low is considered a good strategy as part of a long-term investment plan. It allows investors to potentially benefit from future growth rather than attempting risky short-term market timing.
Paul Clitheroe is the Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board, and chief commentator for Money Magazine. He provides insights and guidance on investment strategies.
Investors can avoid financial disaster during uncertain times by avoiding market timing, focusing on a diversified investment portfolio, systematically adding to investments over time, and maintaining a long-term perspective.
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