The common mistake new investors make, as told by one moomoo trader

Putting your eggs into too many baskets may expose you to over-diversification, says one Moomoo investor. PIc via Getty Images.

An active investor on trading platform moomoo tells how overdiversification has impacted her portfolio.

Diversification is one of the first fundamentals of investing. By spreading your eggs across many different baskets, you’re less likely to get wiped out due to one negative event.

Warren Buffett however is famous for disagreeing with that concept, at one point saying that “diversification is protection against ignorance and makes little sense if you know what you are doing.”

While many of us can still claim to be ignorant investors, Buffett is right in the sense that over-diversification could and does in fact reduce overall returns.

Over-diversification happens when the marginal loss from having a high number of stocks in a portfolio starts to outweigh the marginal benefit of reduced risk.

For example, if you have 200 stocks in your portfolio, you may have reduced your stock-specific (unsystematic) risk, but you may still lose money due to the sheer number of underperforming stocks in that basket.

You may also end up in a neutral position (no profit and no loss), but then what’s the point of investing?

There is no set number, but experts believe that 20 stocks are the minimum number necessary to get optimal diversification, while it’s best to cap that at around 30 stocks.

Interview with a moomoo user

Many Aussie investors have had their share of mishaps when it comes to diversifying, or over-diversifying their portfolio.

Sera, a Sydney mother and investor on the trading platform moomoo, shares her story on how over-diversification has impacted her portfolio. She gave the following interview to moomoo.

When and why did you start investing?

“Like many, the pandemic gave me a lot of time to think about my long-term goals. It was definitely the catalyst that brought me into trading for myself,” Sera said.

“I have been watching them for a long time but began actively trading on moomoo early this year. My grandpa taught me to pay attention to the markets and how to read a form guide for the races when I was very young.

“As I get older, I lean more on the latter as I try to build something up for my children and hopefully grandchildren. As an Australian, economically, it hasn’t been great in recent times.

“The cost of living, housing, and inflation are at ridiculous levels, so I turned to invest in something with hopefully better returns rather than saving and losing value in the banks.”

What lessons have you learned?

“Balancing diversification, without spreading myself too thin,” Sera said. “This has been a hard lesson with some losses but also a lot of gains both financially and in experience.

“I found diversifying too much over too many markets was something to reel in, I need to sleep sometimes, whilst also not putting too many eggs in one basket also.

“I love a few particular Australian stocks for long-term investments and a little day trading – Liontown, Jervois Global and Novonix would be my top three. I have a little in the Hong Kong markets, Euro and US also. I prefer to get familiar with the stock before I invest.”

What research do you do?

“I like to get up-to-date news first and foremost. I read as many factual articles as I can, to get a sense of a company’s actual value, whilst also following the faster trends,” said Sera.

“I also needed to familiarise myself with some of the obscure terms and language, especially in some of the company reports.

“I love having access to that, and along with real-time data, it’s a great tool to watch and track. Put tools to use and get familiar with your investments is key for the long term.

“Moomoo has great tools for virtual portfolios and paper trading, coupled with fantastic information on each stock with up-to-date news and analysis. I use not only news but track charts and trends short and long-term. I use 1m, 4hr, 1 day, and 1wk charts the most.”

“Of course, my charts with macd, obv, rsi, etc. are the basics, but watching the volume and turnover, against the price changes are also helpful. You can see how much ‘push’ there is on either side which gives a better idea of which way the share prices will go over the daily charts.

“I always try to buy in a dip whether it’s short or long term as you can see on my favourite 3 stocks to keep – keeping my average as low as possible whilst adding more funds. I use all these things together to give me an idea of sentiment as well as facts.

“These 3 – Liontown, Jevoir Global and Novonix – I have researched well and believe long-term will be great returns with huge projects beginning this year or being approved for 2023 and beyond.

“I also like the growing EV industry, but it also needs mining and materials like lithium and cobalt, hence I believe these companies are going to be great mid and long-term.”

What is your daily trading routine?

“I am up early so I always check my accounts with morning coffee, hopefully before the close of US markets at 6am Sydney time,” Sera explained.

“I have investments in Australia, the US, Hong Kong and Europe, mostly in the energy, fuel, and shipping industries. I’ll look at the entire industry, find a few companies I like and either invest or track via virtual portfolio for a little while to find a good entry point.

“Our local market opens at 10am, and Hong Kong opens at 11:30am, so I’ll always be checking fluctuations, charts, and news for the day. Maybe a little trading if the day calls for it.

“Then at 5pm Euro market opens, and the Hong Kong market is usually driving home a closing price for 6pm my time so I’m very active at that time.

“The US opens at 11:30 pm my time so again, I’m usually making a trade or two prior to bed or if the market calls for it. I literally check moomoo last thing at night, and first thing in the morning.

“Remember I said I could spread myself thin, but I love it!”

What’s your best trade ever?

“Liontown would be my best trading so far in terms of stable percentage profit, up over 58%, before buying more, bringing my average down to around 20%, and today it’s over 29%,” Sera said.

“Those are the long-term investments, I also have made a quick 45% off Zimplats, twice, on another platform using CFD.

“Buying in at 45, selling at 49, right before dividend dates approached.

“I don’t recommend using leverage a lot though, as the ex-div date came along, the rest of my Zimplats positions, around 45 or under, have slumped way more than I anticipated.

“So that’s a higher taking of profit, for 2 trades, but as a whole, it’s not the smartest for the rest. I should have invested more post-dividend date, not prior. win or learn, never lose!!”

Why switch to moomoo?

“I began experimenting with using many platforms for crypto and stock,” explained Sera.

“I found moomoo’s paper trading and virtual portfolios are a fantastic tool to not only track investments but get familiar with the platform as each is very different.

“I can say moomoo is far superior with the number of tools and information available. I had invested mostly in crypto prior and after some big losses, I decided that extra volatility is not for me.

“I simply don’t have enough time to track it 24/7, so I switched to focusing more on the stock markets.

“I find certain industries interesting, and the entire industry of the stock market is certainly interesting. I realised that I not only want to invest long-term, but also enjoy a bit of day trading so I do both.

“I have two portfolios right now, but moomoo is my absolute fave.

“I’d love to consolidate them all on here one day though and I already know moomoo is working hard to make the structure more conducive to Australian users which I appreciate greatly.”

How can moomoo help?

Moomoo has features including a stock screener and a heat map, that can help you pick the best opportunity within minutes using your own strategy. Without needing to look at all these charting tools on each stock one by one, you can put in your technical indicator or fundamental indicator to find your best pick.

The heat map, which you need to pay for when using most investing apps, is free on the moomoo app. It gives you an overview on what people are buying. Moomoo also allows you to see what professional investors such as Warren Buffett are picking thanks to its institutional tracker.