A WORD OF WARNING TO DIY INVESTORS
Mark Lister, 3 August 2021
A new breed of DIY investor has emerged since the beginning of last year. While the COVID-19 induced lockdowns of 2020 were a catalyst for the burgeoning interest in share investing, I think the movement was already building.
Information about companies is easier to find than it used to be, and you no longer need to be in possession of an expensive Bloomberg terminal to get it. The advent of user friendly apps and interfaces to make buying and selling easy and enjoyable has also been a catalyst.
Many younger people like the idea of taking control of their finances, while our unaffordable housing market has played a part with many giving up on the dream of home ownership anytime soon.
I’m in two minds about how I feel about all this. On the one hand, I think it’s great that we’ve got a whole new generation of investors taking such a strong interest in financial markets.
That’s exactly what we need to broaden our markets, give productive businesses the capital they need to grow, and to shift our reliance away from housing as the investment of choice.
This should also see financial literacy improve over time, with people much more incentivised to educate themselves when they’re directly invested in companies.
It’s also great to see these attitudes drive fresh innovation across the industry. Many established players are being forced to adapt, as they realise people want to take more interest in their investments and be more involved in the decision making.
However, this new variety of sharemarket investor does worry me a little.
I haven’t been around as long as some, but one thing I’ve learned in my career is that buoyant markets drive complacency and overconfidence.
When markets are strong and just about everything is going up, making money feels straightforward and it’s easy to mistake luck for skill.
Markets have been marching higher for a long time now, pretty much since the lows of the GFC in 2009. Anyone who’s become a share investor (or an analyst, fund manager or financial adviser) since then hasn’t experienced a really difficult period.
Sure, we had a bear market in 2020, with New Zealand and international shares falling 29.6 and 33.9 per cent respectively, but that was a little different.
For a start, the decline wasn’t nearly as steep as the falls we saw in the GFC, when the S&P 500 in the US fell 56.8 per cent from top to bottom and the NZX 50 declined 44.2 per cent.
Secondly, and probably more importantly, last year’s slump was over in the blink of an eye. Sharemarkets fell for five incredibly volatile weeks, before they bottomed out and started rebounding rapidly. It was the quickest bear market in history, and the shortest US recession on record.
The GFC was a whole different kettle of fish, and it felt much, much more unsettling. Markets peaked in October 2007, but they didn’t reach their trough until March 2009, almost a year and a half later.
Five weeks isn’t a lot of time to panic, but in 17 months there is ample opportunity for all sorts of bad decisions to be made. Over that period, many wounded newbies would’ve cut their losses and bailed out, while others might’ve doubled (or tripled) down only to watch markets fall even further.
Without any wise counsel from those who’ve been there before, how many of these scarred investors would’ve written the sharemarket off as a casino, never to wade in again? That’s what happened in 1987, and it turned a whole generation off shares.
It’s fantastic to see a new breed of investors develop but I’ll be honest, some of the comments I see on social media groups or hear at barbeques make me cringe with worry.
Investing is simple, but it’s not easy. Don’t bite off more than you can chew, and never be fooled into thinking you’ve got all the answers.
Don’t be afraid to get some good advice and independent research either. It doesn’t cost nearly as much as you might think, and it’ll more than pay for itself if it leads to better judgement and helps build your knowledge base for the future.
For more on this topic, watch the FMA Great Debate 2021 - ‘Investors are better off using experienced advisers than trying to DIY’.