School of COVID-19: Noob investors use crisis to learn stocks
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Sydney-sider Madden Burns is exactly the type of investor who is currently giving the professionals conniptions: she’s young, not overly educated about investing, and she jumped into picking her own stocks on the back of the March market rout.
But her reasoning for getting in, much like many of the new investors attracted to the ASX and other markets in the last four months, is why not start learning now?
“My original investments, managed funds, I went for them because I felt like I had no idea how to do it myself — I hadn’t heard of Commsec or anything at the time. But I knew I had to get into investing for my future financial security and managed funds seemed easy,” she told Stockhead.
But, uneasy about how little she was learning just by parking cash in a fund, Burns started wondering about going DIY.
“During the downturn in March everyone was like ‘you need to buy stocks’, and I thought it would be a good time to learn,” Burns said.
Stories of retail investors using the COVID-19-induced market volatility to learn or have a go, like Burns, are not uncommon now.
Indeed, the Australian FIRE (financial independence, retiring early) thread on Reddit includes a number of self-proclaimed millennial “noobs” looking for advice in the last month on how to invest in the sharemarket.
Arin Melvin, a 30 year old personal trainer from London, started investing at the beginning of the UK lockdown because cancelled holidays (and weekends) meant he had a bit more cash on hand.
“I was always interested in investing but a little hesitant to get started as it seemed quite overwhelming. I had a basic understanding of how to invest in markets but it was quite rudimentary and general,” he told Stockhead.
But professional investors and even corporate cop ASIC are worried that most of the amateurs trying stock investing for the first time have bet the house without the financial understanding to know what is good and what is a falling knife.
The implications of the COVID-19 pandemic have left few unaffected; almost 200,000 people lost their jobs in a matter of weeks, and many more found themselves on reduced incomes.
Richard Montgomery, investment communications manager at BetaShares, says the pandemic’s economic consequences have reinforced basic lessons around having savings and being financially prepared.
But the market volatility and subsequent nationwide restrictions on movement also led to massive numbers of new trading accounts being set up — 3.4 times more than normal at over 140,000 between the end of February and the start of April, according to corporate cop ASIC.
ASIC also outlined just how risky the bets were being placed by new investors, with significant interest being directed to geared exchanged traded products, oil-related financial instruments, and even difficult-to-understand synthetic investments called contracts-for-difference (CFDs).
At least one professional believes the amateurs are enjoying themselves too much to be making safe investments: “It’s not healthy to have people buying stocks for fun.”
Wealth Within chief analyst Dale Gilham says losses incurred, either from losing jobs or from the market, over the last few months have been a wakeup call for many people to get their financial houses in order.
“Right now, a small number are realising that in order to retire early they need to take control of their money but to do so means they need to get a good education.”
Gilham says part of that investing education is following the rules: buy quality, have an exit strategy, and diversify but not too much.
Burns’ motivation for buying stocks was to gain an understanding of how and where her money was invested, and have more oversight particularly around ethical investing.
Through US stock market investing app Stake and with $7500, Burns bought Atlassian, because she’s worked with that company through her job at the Workplace Gender Equality Agency.
Slack is in the portfolio, because she uses it for work and has friends who work there; Uber, again because she uses the service; Vivid Solar following work at UNSW involving solar technology; and Hewlett-Packard because they were cheap enough to have a go at with the money she had left over.
Burns is up 24 per cent so far, “but how much of that is luck I don’t know”.
She says she might look at Australian stocks, but in a refrain commonly heard amongst young investors, isn’t overly interested in the options available here.
“The companies that I know and that I use everyday are based in the US. A lot of the companies on the ASX are big resources or mining companies or big banks that I’m just not interested in,” Burns said.
Melvin says his riskiest investments areBoeing, Easyjet and RyanAir, hit hard during the coronavirus pandemic but which he thinks have good long term value as travel returns. The safest is Apple, bought again because of their visibility in the market.
“US tech stocks seem to be on the up in general at the moment. Everywhere you look, people are always buying their [Apple] products so I think they’re a safe bet when it comes to buying stock,” he said.
Burns’ market education comes from friends who work for high frequency trading company Optiver (they didn’t approve of her Uber investment, but backed her on Atlassian) and reading Stake’s Facebook and Reddit forums.
Melvin’s was via the eToro investing app podcast, ‘invest and digest’.
And while Wealth Within’s Gilham believes Australians’ low levels of financial literacy are “the reason why many investors remain with managed funds that achieve mediocre return”, Burns and Melvin make the point that investing well is a full time job.
“After this I think I will continue doing managed funds,” Burns said.
“I have learned that if I’m going to do this properly, I need to stay on top of things. It is a lot of work, I have to read annual reports and stay on top of how the company is performing. So I wonder whether I have time to do that work or whether I’m even capable of understanding the details.”
Melvin doesn’t want it to become a full-time job “where I’m checking my portfolio everyday” so he’s trying to keep his strategies simple and long-term.
While new stock market investors are likely to take some losses on their first foray into equity investing, some believe that this could be a turning point for financial literacy in Australia: both for professionals in how they communicate with new investors, and for young Australians who are largely teaching themselves and taking responsibility for their own financial security.