Lockdowns have provided a great opportunity to learn new skills—from baking, to gardening, to learning a language. But trading shares online, like rewiring the house, is not something you should do without professional advice.
In May, regulator ASIC1 warned retail investors of the risks of short term trading. The regulator said its own analysis of securities markets during the lockdown had revealed a substantial increase in activity by retail investors or ‘day traders’—people now using easily accessible software and trading tools to try to time the market.
Not only had trading frequency increased rapidly during the pandemic, but the duration of people holding securities had fallen significantly. In short, it looks like folks in isolation at home have been trying to generate quick windfalls from market volatility.
“Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge,” ASIC said. “For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses—losses that could not happen at a worse time for many families.”
Of course, a common reaction to these sorts of warnings is for people to say to themselves: “It’s true, but I’m extra careful and I know what I’m doing.”
Unfortunately, there is little evidence that there is a burgeoning industry of successful home-based stock traders out there. ASIC says its analysis found retail investors chasing quick profits traditionally perform poorly in good times and bad, and even in relatively stable, less volatile market conditions.
“Therefore, retail investors should be wary of trying to ‘play the market’ for short-term price movements by day trading.”
On top of failed timing attempts and short-term holding periods, ASIC also expressed concern that unsophisticated investors are increasingly trading in complex, often high-risk investment products like highly-geared ‘contracts for difference’ (CFDs).
“Leverage inherent in CFDs magnifies investment exposure and sensitivity to market volatility, so retail clients should be particularly cautious about investing in leveraged products at this time,” the regulator said.
The danger of attempting to ‘play’ the market through short-term trading and timing strategies was highlighted recently with the “short squeeze” on GameStop. GameStop’s rise and fall in price was extreme, with some making a lot of money but most losing the lot!
So, while the COVID-19 isolation period has encouraged many of us to become more self-sufficient, short-term trading in stocks and derivatives may be a bridge too far for the do-it-yourself brigade.
If you’re looking to become a long-term investor, commit to a long-term strategy that takes your own ideal life and financial situation into account. Investing is a lifelong journey. Making money slowly is much better than making—then losing—money quickly.
1. ‘Retail Investors at Risk in Volatile Markets’, ASIC, 6 May 2020.
Anthony Warr - "I believe successful financial and wealth management starts with purpose, and this is only possible with clarity around values and goals. This is where we begin."
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