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How to Be a Sensible Investor

Updated 23 Jun 2022
How to Be a Sensible Investor

Lockdown boredom and extra savings triggered interest in the stock market, and as a result, there was a rise in day traders trying to make the most of the market volatility. As per Reuters, retail investors accounted for about 10% of the daily trading volume on the Russell 3000. The rally started in 2021 with the ‘meme stocks’ such as AMC Entertainment and GameStop, which soared more than 1000% in no time.

This left the professional traders wondering how they had gone wrong. Several traders are now indulging in day trading. What starts as a hobby can end up putting many in debt. Even worse, many day traders think that they are only financial traders but its not long before they have three screens open and are edging closer to quitting their day jobs. Some of these traders even find themselves in rehabilitation programmes today.

The phenomenon is new, but it is growing as online trading can be conducted easily on different platforms with minimal fees. Besides stocks, many users have started crypto trading, and the ‘addiction’ is only growing. As such we find ourselves asking the question, is there such a thing as sensible investing?

The rise of online addicts

During the pandemic, several platforms introduced trading for the masses and it gave an avenue to investors to carry out financial trading without the need for an advisor. Until then, only highly trained professionals used to carry out financial trading in the markets. According to the research firm Consumer Intelligence, about 1.8 million adults in the UK started day trading on online platforms during the pandemic. The rise is also due to the hundreds of influencers on Instagram, Facebook and YouTube providing advice on how to get started with investing.

That said, there is also a rise in the number of platforms that allow anyone to be a trader after they have passed the preliminary checks. It can be a profitable source of income for some, but for many others, it could also foster compulsive behaviour and lead to a huge financial loss. It is not possible to predict the market movement, and you might feel like you have a hold on what’s going on around you, but it could be very temporary. Some of the most experienced professionals do not day trade. It is a very high-risk activity with euphoric highs and lows.

Some trading platforms also provide quick access to short-term markets and lure customers through free trades. Many platforms fund the account for the user to make their first trade. These users are, in effect, being exploited by the trading firms. Investing will require discipline and patience, while day trading is all about the quick gains, which could also become heavy losses. When you look at it from the regulatory point of view, it is classified as investing and there are no other warnings. If you do not have a sufficient understanding of the products, you can get into the vicious circle of high-risk and highly addictive investment techniques. For many, this addiction to the platform has taken a huge toll on their mental health.

For a lot of traders, the statistics and warnings add to the seductive nature of the challenge and they get a sense of triumph when the trade comes off.

Gamification of trading

There is a ‘gamification’ of stock trading that has blurred the lines between gambling and investing. This has created a number of side effects. The US Securities and Exchange Commission has opened an investigation into how much investment advisors and brokers are using gamification tactics to influence the investors and encourage problematic trading. Addiction to stock trading has several similarities to gambling addiction, and traders tend to take extreme risks for the thrill and high payouts. They ultimately turn to gambling helplines, seeking help from the addiction.

According to a Financial Times report, gambling helplines have seen a 50% surge in the day trading-related calls since the onset of the pandemic. The acting executive director of the Council on Compulsive Gambling of New Jersey, Felicia Grondin, believes that the absence of other things to bet on, such as horse racing and sports, during the pandemic has led gamblers to the stock trading platforms, which offer the same thrill.

sensible investing

Red flags to watch out for

If you think that you might have issues with stock trading addiction, here are the potential red flags you need to watch out for:

  • Your preoccupation with stock trading has left a negative impact on your relations with others, your health and your work.
  • You seek higher potential payouts for the trades to keep up the excitement.
  • You do not have any interest in hobbies you once enjoyed.
  • You lie to loved ones about the extent of your losses.
  • You have tried to quit but were unsuccessful.

How to be a sensible investor when stock trading

Trading in the stock market is not all about the quick gains or heavy losses. If you take the right steps and remain patient, it is possible to make money in the long term. Here is the right way to trade.

1. Use your knowledge

Besides the knowledge of basic trading procedures, you need to stay updated on the latest stock market news and events that could potentially affect stocks. So, always do your homework and make a list of the stocks you would like to trade. Remain informed about the chosen companies and the market volatility. Knowledge is power, and if you research well, you will find stocks that are a great addition to your portfolio.

2. Set a budget

It is important to allocate a fund. Assess how much capital you can risk on each trade and stick to it. Do not be lured into spending more than the budget you have set aside. If you have excess funds, you can set aside the surplus amount to trade with, but do not make it a habit.

3. Set aside time

You will need to set aside time for making investment decisions. If you are thinking about day trading, you will need to set aside a couple of hours, and if you do not have the time, don’t consider it.

4. Start small

Sensible investing is all about starting small. You must focus on a few stocks in each investment session and hold them for the long haul. There are several growth stocks that have generated impressive returns over the years. It has also become common to trade fractional shares – so, you can specifically trade in smaller amounts and own some of the best stocks.

5. Steer clear of penny stocks

You might be looking for great deals and low prices, but it is best to stay away from penny stocks. They are liquid and your chances of hitting the jackpot are minimal. A lot of stocks trading under $5 a share become delisted on the major stock exchanges – so, stay away from them.

6. Be logical about the profits

You cannot win every day in the stock market. Your investment strategy does not need to win all the time to be profitable. Some investors only win about 50% of their trades, but they make more money than they lose. This is why sensible investing is important. You need to ensure that the risk on your trade is limited to a certain percentage of the account and that you have clearly defined entry and exit methods.

7. Focus on your plan

If you want to generate wealth in the long term, do not pay attention to the market volatility. It is temporary and the cycle will pass. You need to stick to the plan and trade safe. Panic selling can cause more loss than gain, and you need to follow your formula closely instead of trying to chase quick profits. Do not let emotions get the better of you.

How can you stay on top of it all?

It is natural to feel overwhelmed from all the noise around you – one investor might hit a jackpot in day trading while another investor is patiently building their retirement portfolio. If you want to stay on top of it all, you need to make well-informed decisions and not get carried away. Here’s how you can go about it.

Do not worry about the small stuff

Instead of panicking over the short-term movements of your investment, look at the bigger picture. Focus on the big-picture trajectory and have confidence in the larger story. Do not be swayed by the short-term volatility. Stop sweating about the few cents difference you can achieve from using the market versus limit order. As a long-term investor, you do not need to focus on the minute-to-minute fluctuations to lock in the gains. You will get dopamine hits from the minute-by-minute movement of the stock price and it can get addictive. However, you need to focus on the long term and consider diversified products instead of sticking to a single stock. Do not change your investment strategy based on the daily news.

identify a strategy for sensible investing

Stay away from the hot tip

No matter the source, do not accept the hot stock tip as valid. Remember to do your analysis before investing your money. Sometimes, tips do pan out, based on the reliability of the source. However, long-term success will require a lot of research.

Identify a strategy and work with it

You can find many ways to pick stocks, but it is important to stick to a particular strategy. Do not follow multiple approaches to time the market – it can prove to be dangerous. Identify the strategy that works for you and stick to it for the long haul. It will help you avoid major losses in case of a crash.

Look at the future

Stock investing is about making informed decisions based on the things that are yet to happen. You can consider past data, but there is no guarantee that it will pan out. Check the fundamentals and trade safe. Invest based on the future potential and not the past performance. Short-term profits may entice you, but to achieve greater success, you need to consider long-term investing. You need to think of the stock market as a roller-coaster ride. Do not get wrapped up in a ‘get rich quick’ scheme – focus on your long-term goals. Let the stock market do what it always does.

Have an open mind

You will find several companies that are household names, but many investments lack brand awareness. Many companies have the potential to become blue-chip names of the future, and even small-cap stocks can show greater returns than their large-cap counterparts. This does not mean that you should devote your entire portfolio to small-cap stocks, but have an open mind and look beyond the top 10 companies.

Diversify

Diversification is the key to building in the long term. You need to build a balanced diversified portfolio of stocks, real estate, bonds and other asset classes. This way, when one market is down, there is still the possibility to make money from another.

Set your goals

When you invest for the long term, you need to start investing with specific goals in mind. It could be anything from buying a home to saving for retirement. Only after you have the goals determined can you project the expected growth you will need to achieve the goals. Keep your risk tolerance in mind to ensure appropriate asset allocation and exposure to the different parts of the stock market. The market will go up and down, but you must not panic. Even if you see the prices drop more than 5% in a day, you should not sell the stock. Avoid panicking and do not sell everything. Even with zero commissions, constant buying and selling will lower the returns.

Entering the stock market can be a gamble. With the highs and lows of the market, it could become frustrating and stressful to make the right decision. However, stock investment is about weathering the changes in the market on a daily basis. You need to assuage your fears and see the value in parking your money in the right stocks. Look for long-term returns and do not be lured by day trading.

If you are entering the market for the first time, get an understanding of the game and be patient. There will be high and low waves, but you will have the flexibility to diversify your risk. So, take time and understand the pros and cons before making any decision.

If you are beginning your trading journey, ensure that you use one of AskTraders’ trusted brokers – this is the first step to a sensible trading approach.