In the absence of retail, hospitality, cultural centres and sporting outlets, many of us have gravitated towards new activities to occupy our time during lockdown. For some, this has meant a foray into the world of sourdough and slow cooking, or a deeper dive into the abyss that is the Netflix catalogue.
For others, as ASIC recently pointed out, the lure of making money off short-term sharemarket opportunities all from the comfort of the couch has instead taken centre stage.
Over the past few months, the Australian share market has seen a surge in retail trading activity, particularly among those who are either new to investing or of a younger demographic. And it makes sense – with less spending avenues, more time on our hands and a stable wifi connection, downloading an online brokerage app and opening an account within minutes seems like a pretty productive use of available resources.
Perhaps you have been meaning to get into investing but had not got around to it and suddenly COVID has provided both the opportunity and the motivation.
The issue however lies in the motive. Are we jumping into the market with a realistic plan and the view that we are investing for the long-term? Or are we essentially downloading an app to try our luck on some shares, where the behaviour is akin to some ubiquitous sports gambling apps?
Many might not recognise what they’re doing as akin to the latter; surely buying and selling reputable blue-chip shares is different to betting on which football team or horse will win next week.
In reality though, the two activities can blur, with day trading perhaps closer in costs and outcomes to gambling than it is to investing.
Unpredictability of the game
Day trading and watching your portfolio value rise and fall by the minute can be addictive. In some ways, it’s not too dissimilar to watching and betting on a sports game. It’s only natural that when our shares flash green and the price goes up, we get a bit of an emotional kick. Similarly, when a goal is scored or a ball well batted, we feel closer to our desired result – a win.
What links the two is the unpredictability of the game and the often impulsive, and perhaps not always obvious, risks we take.
Volatility is a fact of life in markets and an extremely difficult concept to capitalise on. As ASIC notes, retail investors are not very good at predicting short-term market movements which more often than not, leads to significant losses for most.
A key reason for this is that timing markets is extremely difficult given the wide range of things that can influence a company’s share price on a given day. Day traders don’t get the benefits of volatility smoothing out over the long run and the resulting underlying market growth. Instead, they have to rely solely on timing the trade. For the average investor who just wants a quick gain, you need to ask yourself whether you are feeling lucky today because the outcome is more likely to flow from luck than skill. It is the difference between investing and speculation.
Every investment decision comes with risk, the level however sharply increases when unplanned for and when a short time horizon is involved. The record rush into global share markets during the COVID-19 outbreak suggests not every investor had a plan. And in such cases, it’s unlikely the investor was adhering to a well-diversified asset allocation which would have built in the necessary consideration of the investor’s risk tolerance.
Past performance is no guarantee
No matter how well a particular share has performed that year, month or even day, there is no certainty that prices will continue to rise after you buy. Going off past performance or a ‘good feeling’ over a planned, methodical investment approach doesn’t always fare well.
As Vanguard long advocates, the key to successful investing depends predominantly on four core principles, none of which includes timing the market or simply taking a gamble.
Instead, what give investors the best chance for investment success is having clear, realistic investment goals, a well-diversified portfolio, keeping a keen eye on costs and ultimately, tuning out the market noise and focusing on the long-term.
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Reproduced with permission of Vanguard Investments Australia Ltd
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