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The recent Wall Street flurry over ‘GameStop’ is the perfect example of why investors should always seek professional advice, unless they’re willing to potentially lose a lot more than they stand to gain.
By Julie Nipperess
There’s a few individual investors licking their wounds from the GameStop saga, and plenty more worried that they missed the opportunity of a lifetime.
I won’t go into the complexities of the whole situation, except to say that at its peak GameStop was trading at US$400, plummeted to around $US50, and has since risen again to about $US120.
For a short time in early February, stock trading platforms froze all trading on GameStop, meaning that users couldn’t buy more stock, but they could sell it.
Some individuals got lucky. Many hedge funds (the professionals) lost billions.
But what the saga does highlight is the rise in the use of trading apps and the power of social media, along with accessibility of the market to first-time and newbie investors, and the dangers therein.
What’s particularly interesting about GameStop, is that the market was influenced by a group of individuals using trading apps and social media, in ways we have never seen before. And the US regulators are looking into the whole scenario, which could also mean new regulations are introduced.
If you’re a seasoned investor and you know what you’re doing, then that’s all well and good.
But many people approach the stock market after hearing stories like GameStop, and hope to ‘get lucky’ by investing in a ‘magic share’.
This strategy is completely flawed for a few reasons.
Firstly, by the time the GameStop flurry hit the headlines, the opportunity to cash in had already passed.
Secondly, there is no such thing as a ‘magic share’.
And thirdly, when the market is highly volatile, timing and knowledge are everything.
The fact of the matter is that the most successful investors make measured (not rushed or emotional) decisions and rely on professional advice, not headlines.
The most successful investors also approach the market with a medium to long-term view, rather than with ambitions to become an ‘overnight millionaire’.
Most importantly, the most successful investors build diversification into their portfolios.
Diversification means investing across different asset classes, often including home-grown investments as well as some off-shore and building a balanced portfolio. This is why managed funds are so popular – they minimise the risk that comes with market volatility.
Diversification is successful because, typically, when one stock doesn’t perform well, the chances are others in the portfolio will be doing well, and overall, average returns will be more steady. In fact, investors with diversified portfolios came out of the Global Financial Crisis of 2007/08 much better off than most others, and fund managers expect to see the same result when market turbulence around Covid-19 settles as it is starting to do now.
Markets react to all kinds of circumstances – economics, politics, social factors, individual company circumstances and financial performance … the list goes on… And we all work hard for our money, so why put it at risk when we don’t have to?
If you want to play around with a few hundred dollars that you’re completely prepared to lose, then investing directly via trading apps can be exciting and fun. But be wary of betting your retirement savings without sound advice.
If you’re interested in investing, talk to us about options that will grow your money steadily over the medium and long term.
This is general advice and should not be treated as personal advice. Julie Nipperess is an authorised representative of Step Up Financial Group Pty Ltd ASFL No: 512509.