Sensible advice from someone knowledgeable with no axe to grind is hard to find – but these tips for “retail investors”, ie beginners, and those who are “effectively clueless”, go a long way towards putting the mystery of investing in these turbulent times into context. – Sandra Laurence
Tips for retail investors from ‘professionals’
By Dawn Ridler*
How can the ordinary investors, the people on the street, called ‘retail investors’ by professionals, navigate these turbulent times? The biggest problem these retail investors have, especially if they have been investing in US markets, is that they have had very little experience in hard corrections in markets, and what to do when this happens. Quite simply, investors who have become used to this rampant bull market are inexperienced at selling.
Retail investors inevitably have dozens of conflicting thoughts running through their heads:
- If I sell now, I am just locking in my loss. Time to hold.
- If I sell the position, what will I do with the money?
- What if everything is going down?
- I read an article or listened to someone that said the company is still good so that it might go back up. I need to be patient.
- I will sell it when I get back to even.
- If I hang in there and the stock goes up, I can get out.
Sound familiar? When you have ‘fear’ talking in one ear and ‘greed’ in the other – your personality will determine who wins? Few fearful retail investors do it themselves for long – it is just too stressful. Professional investors don’t have the emotional attachment to the investment, making it easier for them to let go. So, what are some tips from professional investors?
- Investing is not all about stocks
To get true diversification you need a blend of asset classes, stocks, bonds, property and cash – onshore and offshore. It might not be easy for a retail investor to get into bonds, but there are retail bonds, a few low cost Unit Trusts and ETFs. Every wealth portfolio that has a clear objective will have an ideal blend of assets. Working out that blend of assets and what to locate when onshore or offshore is often not in the skill set of a retail investor.
- Sell losers short: let winners run
It seems like a simple thing to do, but the average retail investor sells their winners and keeps their losers. This is because emotion comes into play. Buying a loser is disappointing and selling it can feel like punishment. It’s like firing an employee that once showed so much promise. Spoiler alert: Shares do not have feelings. They are not going to bite you, bad-mouth you, turn in their grave if you sell them. Here is a nice trick: when you need to make a decision on whether or not to sell a loser, ask yourself if you’d buy it again today. All shares go through cycles – if it is a quality share just having a little short-term wobble, just gone off the rails, but fundamentally all the reasons you brought it in the first place are still there – then there is no need to sell it. This of course assumes that you’ve done your homework when buying the share, not just gone with some hype you picked up on social media or from a friend.
- Buy stocks cheaply and sell high
You haggle, negotiate and shop extensively for the best deals on cars and flat-screen televisions – but you’ll pay any price for a stock because someone on TV told you to? It’s a good idea to have a ‘wishlist’ of stocks and to research and follow their stock prices. You’ll soon get an idea of when it’s at a ‘good price’ – maybe it’s been put on ‘sale’ through no fault of its own, but has been affected by a market, sector slump or even a breakdown in global liquidity. We saw this phenomenon quite starkly when the Covid panic set in. Everything was on sale. It didn’t take smart investors long to pile in (less than 3 weeks) and buy up quality stocks, really cheaply. Be patient – wait for the right price. Buy in haste, repent at leisure.
- It’s going to be different this time
The very long bull run in the US has lulled many investors into the belief that cycles are ‘broken’, that we’re never going to see another serious market correction. The Covid event has been dismissed as a ‘black swan’ event and investors have kept on piling into the market. As the saying goes, “History may not repeat exactly, but it often rhymes exceptionally well”. A correction is coming and if capital preservation in the medium term is important (coming into retirement for example), then structure your wealth portfolio accordingly. Haven’t done so? Perhaps it’s time to engage a professional who can assist with the best course of action.
- Be Patient
As with item number 2, there is never a rush to invest. Have your wish list, watch your stocks and buy when the time is right. With retail investors, cash lying around often burns a hole in our pocket. Professional investors will happily put it into a money market, earning a little bit of interest and wait for the right time to pounce. It shouldn’t come as any surprise that professional investors love mopping up the messes retail investors make.
- Turn off the noise
All investors, professional or retail, will have a method for picking out shares they want to own – but obviously the strategies and methods are quite different. Professionals will analyse their portfolio using cold statistics and research. Retail investors usually don’t have access to the research that professionals have to ‘find’ stocks, so must rely on popular media which is notoriously inaccurate. Retail investors usually fall into one of two schools: Buy and Hold (sometimes for decades ,holding onto stocks way past their sell-by date.) The other school involves endless fiddling and worrying.
Watching markets on a day-to-day basis is entertaining, but usually irrelevant to your portfolio. If you’ve bought a quality stock and none of the fundamentals have changed, then listen to the music and be patient. It is just noise. The Covid event was an interesting case-study in changing fundamentals. Once the initial 3-week panic when everything was sold off ended, investors started to guess where the opportunities and threats might be once ‘lockdowns’ became the preferred containment method. Some of these worked, others not. Some were a flash in the pan (Zoom), others have still not recovered (cruise liners).
What is important is getting a feel for trends, understanding what major changes are coming down the pipe, and use that to influence your decisions. It is easier said than done: very few investors, professional or retail, get it right even most of the time. FOMO is real, so recognise it for what it is and avoid at all costs.
- Understand the risk
There is risk and there is opportunity. Risk is what you can lose, opportunity is what you can gain. Stocks are not the only asset on the block, there are other asset classes with different levels of risk that you can use to diversify your portfolio.
Each asset class and sector has an inherent risk profile. With stocks you can lose 100% of your capital (even more if you’ve been dabbling in leverage derivatives or other products). You usually don’t lose capital with a money market, but you can with bonds. Property used to be ‘as safe as houses,’ but it has become a much more uncertain asset class of late.
There is another risk, especially with retail investors – and that is being (sorry) effectively clueless. If you’re not familiar with the Dunning Kruger effect – Google it. It takes a lot of time and a fair amount of skill to be an effective, let alone successful, investor. Know your limitations. You can get a lot of the upside from the stock market from ETFs, and as you get more experience move into more niche ETFs. That way you don’t have to do all the share-specific research, just know which markets, regions or sectors you want to invest in. Remember though that ETFs pose their own risks depending on the underlying asset/s they are exposed to.
Risk is not just about how much you can lose, or how you’d feel about it. The risk is the impact of losing capital on your lifestyle. Of course age is important; the younger you are (further away from retirement) the more time your capital has got to make up for ‘mistakes’. This isn’t about your tolerance for risk, you might be quite comfortable with high stakes gambling. Taking a risk in an investment or strategy is not equivalent to how much money you will make. It only equates to the permanent loss of capital incurred when you are wrong.
- Contrarian investing
Research has shown that retail investors usually make the right decision in the middle of an upward trend, but rarely time the top of the market with any accuracy. When everyone is piling in, FOMO is in full spate and it’s probably the time to ‘lock in your profits’. This is what professionals do. They pick up shares that you’ve dumped and put on sale at the bottom of the market – and then sell them back to you when they reach the top. Locking in profits isn’t always selling all of the shares, just bringing it back in line with the rest of your portfolio. Share concentration is when you have a disproportionately high percentage of a single stock (or sector) in your portfolio, and this often happens over time so it might have a fat CGT (Capital Gains Tax) bill embedded in it, making you even more loath to sell the share.
- Paying anyone for your hard gotten gains.
Capital Gains Tax sticks in everyone’s craw. There are some strategies to get round this. You can use your annual R40k allowance (you lose it if you don’t use it) or speak to your discretionary asset manager, who might have some tools to help you defer the tax. When all else fails just remember that you only have a Capital Gain because it has grown and is not a loser. It might be a good time to get rid of some of the losers with a capital loss – because they offset each other.
- Know when you need professional help.
It isn’t enough to know how your investments are doing and how they are growing, you really need to know how much you are going to need for your objective – the big one, of course, being retirement. Yes, cycles in the stock market usually correct with time, but what if that correction comes just when you need that capital, and it is suddenly down by a third? Some 5 years out from retirement you need to start aligning your portfolio to your future needs. This isn’t a matter of selling stock and buying other assets – tax, retirement fund regulations, income yield, changing income needs, impact of inflation and other aspects need to be taken into consideration. When markets go up and down by several percentage points daily, why be a cheapskate about 1% or so in annual fees?