Like many of you, I started buying and selling stocks when the Coronavirus pandemic hit. Along the way, I made, then lost a fair bit of money. I’d like to share with you a few of the lessons I learnt the hard way.
What was fun and felt like an easy way to make money soon became a source of stress, addiction and financial loss. I’d be glued to my trading app from the moment the U.S. stock market opened, and sometimes late into the night when I invested in the Asian stock markets.
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Find A Broker You Can Trust
A prerequisite to finding success in the stock market, is to trade through a good broker. All too often, I’ve seen friends and family open accounts with traditional brokers who charge exorbitant fees. A broker I won’t name charges $50 to open a position, and another $50 dollars to close a position. These fees will eat into your expected return, and may ultimately mean you make a net loss even though your trades were successful.
If you are new to trading, take time to search and compare brokers on comparison websites like TrustedBrokers. Read reviews, customer feedback and take time to look-up their fees. These may include trading commissions, spreads, margin trading fees in addition to other administrative fees. Fees aren’t the be-all and end-all of trading, but they’re important nonetheless.
Keep your emotions at bay
You’ll be your own worst enemy if you let emotions shape your behaviour. Like many, I was tempted to buy stocks that had already risen a lot, because they felt like a “sure bet” and I don’t want to “miss out”. I was also tempted to sell out of stocks that had fallen in value, simply to “cut my losses” and move on. However, buying at the top and selling at the low is a guaranteed way to lose money and destroy your hard-earned savings.
Instead, the best investors follow a contrarian approach. They’ll buy when others are panick-selling, and sell when others buy for fear of missing out. They’ll wait patiently on the sidelines for a better time to buy if the stock they’re considering has risen above their preferred purchase price, and will never “chase” a stock. This requires a high level of conviction, confidence and patience.
Investment small amounts
It can be tempting to go “all in” on a stock or an ETF if you have high conviction in a company or a sector. However, there’s no such thing as a “sure bet” when it comes to investing. For every buyer, there’s a seller with different, and sometimes opposite beliefs. Besides, circumstances can change fast as new information becomes known.
For example, investing in oil seemed like an obvious choice after Russia invaded Ukraine. However, oil fell below its pre-war levels within months of the invasion, after an initial spike. Russia was able to side-step sanctions by selling its oil to buyers in China and India. This also happened at a time when the US started selling oil from its strategic reserve, and coronavirus lockdowns in China caused demand to soften.
Because no one can predict the future course of events, you should always scale-in your investments. Start with a small position (no greater than 1% of your portfolio), and increase it gradually if events unfold as you expect. If you are right today, you’ll be right tomorrow. And if you were wrong, you’ll find it easier to close a small position early. Investing small amounts will also help you keep your emotions at bay, because the stakes are lower.
Focus on the long term
Over long periods of time, investing in the stock market can build wealth. However, the return on your investment will depend to a large extent on your initial purchase price. If you’d invested in the Nasdaq at the top of the dotcom bubble in March 2000, it would have taken you a little over 16 years to breakeven. But if you’d waited until the Nasdaq bottomed in October 2002, you would’ve been in profit almost immediately.
That’s why it helps to be aware of the wider macro-economic context. When the world went into lockdown, central banks around the world cut interest rates to zero and printed money on a scale never seen before. This sent all asset prices higher. Some have called this the “everything bubble”.
However, central banks around the world have started increasing interest rates aggressively in an attempt to reduce inflation. This also explains why stocks, bonds, crypto-currencies and real-estate prices are falling. If you’re out of the market, it may be in your interest to wait until they bottom, before investing.
If you’ve ever visited a broker’s website, you may have noticed risk warnings stating the percentage of traders who’ve lost money. These percentages vary from broker to broker, but usually range between 60% and 80%. In other words, you’re more likely than not to lose money if you let your emotions take over, and chase past rather than future performance.