Don’t be that guy: 3 simple rules for investing in a volatile market
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Everyone says they have their own rules for investing, but online chat forums are littered with comments like this one:
“I always do my research before I buy. but with this one I took a gamble, only because I had it to gamble. I have a substantial amount locked with JPR. And I feel if open goes the opposite of its last 2 days I could be scarred for life. never again!”
The two day rise and fall of penny stock Jupiter Energy (ASX:JPR) in late April, a company that is no stranger to unsubstantiated share price jumps, caused many retail investors to break their rules.
They’re not the only ones though, as the corporate cop expressed dismay last week at just how many newbies have jumped into the turbulent market since late February, at enormous cost to their wealth.
Wealth Within chief analyst Dale Gilham says when it comes to the stock market “investors are more like children diving their hands into a lucky dip hoping they will get something good”.
Being hard-headed about following simple rules when investing is how not to lose money, he says.
Only buy quality blue chip stocks, Gilham says.
“The majority of investors randomly pick stocks with no reasoning, no planning and no goals other than to make money and this means their portfolios perform poorly. They often buy small cap or speculative stocks mistakenly thinking they are cheap.”
Gilham recommends to diversify your portfolio, but not too much.
“An over-diversified portfolio leads to more risk and poor returns,” he says.
The most important rule of all is to always have an exit strategy.
“Not using this last rule is why so many get poor returns,” Gilham explains.
“Not having an exit strategy is like driving a car with no brakes, whilst you may get up to a comfortable speed and be enjoying the ride, you are an accident waiting to happen and as history shares in times like the GFC and the current coronavirus crash sometimes those accidents are catastrophic.”
Bear markets, like the one we’re in now, are a different beast entirely as well.
The unpredictability of market swings means dollar cost averaging, where a purchase is divided up into periodic orders to try to reduce the impact of volatility overall, does not work as well.
“I see so many people experience losses and poor returns from following this strategy,” Gilham said.
Then there is the mantra ‘if I have not sold, I have not lost money’.
Small cap investors will be familiar with a long list of companies that have promised the world and are now either delisted or stuck at 0.1c.
“[Not selling] is a false assumption that costs investors dearly in their attempts to get good returns in the market,” Gilham said.
“With investments you always need to look at them in terms of ‘what if I had to liquidate them into cash today?’ Holding onto stocks that are falling in the hope they will return to their previous highs is not wise.”