Wednesday, 12 February 2014

Golden Rules for Share market novices

One of my good friends, who has never invested in the share market recently opened a trading account and was looking to invest in basic index ETFs as a starting point but then got very nervous when they saw the share market falling.  I found myself writing a long email to them about the psychology of investing and I thought I would replicate the tips here.

Here are some golden rules that new investors should stick to when investing in the share market.  These may seem basic to experienced investors or if you have been trading for a little while...but if you are a new investor I suggest taking them on board.

Golden Rules for Share market novices

  1. You never have to trade
    • There will always been good deals available and although some will be better than others, deciding to buy or sell without thinking through your decision because of something you've heard or seen is almost always a bad idea
    • You never have to trade - there will almost always be another opportunity
  2. Stop checking your portfolio every day
    • Unless you are a full time trader you have no reason to check what the price of your investment is doing every single day - it will  just stress you out
    • Share markets move up and they move down.  Stay on top of the fundamentals of your investment but if there is no new news ignore what the share market is doing
  3. The market going down is not a reason to panic
    • These days I feel much more uncomfortable when I find myself buying into a strong rising market rather than into a market that has been hit hard
    • If you think about yourself as a bargain hunter it makes it easier - you want to buy when things are on sale
      • I know this is a really simplistic view of looking at things but it avoids getting over confident and from panicking when the market is going down
  4. If you don't understand it...don't buy it 
  5. Stock tips from anyone, but especially from a newspaper are a silly idea
    • Every so often I'll see a newspaper print an article in the money section about a stock that is a great idea
    • If everyone is reading it then you have no special information and the chances are that the stock has already responded to whatever is in that article
    • This is not to say that you shouldn't take ideas from articles like this.  Industry information or general trends that help your investment knowledge are a great way of learning more or generating your own ideas
  6. Watch your trade costs - don't trade too much
    • Although you may not pay more than $20 for a trade, these trade costs can really start to add up if you are trading all the time
    • The only person that over-trading makes money for is your broker.  At best I have one or two investment ideas a month...are you really researching enough to be trading more than that as a beginner?
  7. Always be able to sleep at night
    • Never invest more than you are comfortable with.  If your share portfolio is causing you to stay up at night then you have too much invested or it is not for you
    • Investments are meant to help you achieve your financial goals which in turn are meant to make your life more comfortable and enjoyable.  
If any other investors have tips for beginners that they have picked up along the way post them below and I can add them to the blog.

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  1. Has your experience in IB helped you at all when it comes to personal investments? Despite all the focus on valuation methodologies and learning about industries in depth, alot of people that I have spoken to from both IB and ER do not appear to be astute investors. In fact, one individual admitted their lack of investing ability, citing over-analysis and an ability to sell ideas rather than act on them.

    1. Hi Edward - you are right on several counts there. The focus in IB is really on selling whatever deal you are working on which means that often you really need to drink the cool-aid. The problem with this approach is that you are not trained to be critical when it comes to your own personal investing.

      People working in ER tend to be much more critical and as they work exclusively with public information they are used to questioning and analysing the information they receive which tends to help with personal investing.

      Honestly working in either industry does not necessarily mean that you become a good investor on a personal level. There are good and bad investors in both. What both industries do teach you though is how much you DONT know which interestingly has the effect that a lot of people in those industries choose not to invest in the share market at all.

      It's a great question and I think I'm going to dedicate a new post to the topic.