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As the GameStop story continues, Rick Eling, investment director at Quilter, explains how to avoid getting burned by the markets.
We are in an era where anyone can invest in shares with just a few clicks on an app. This week’s GameStop frenzy proves this. Retail investors egging each other on through sites like Reddit have caused massive gains and wild swings in an unloved retailer. They say they’re taking on Wall Street, but many of them are only taking on losses.
However, reading the thread on Reddit, I’ve seen a lot of inexperienced first timer investors convinced that this is easy money. But real investing isn’t an overnight ‘get rich quick’ scheme; it takes work and time. I fear for the safety of these over-excited newcomers.
While the GameStop situation is in many ways a textbook speculative mania, it does have two features that make it interesting:
- The use of a social network (Reddit) to co-ordinate the activity of a large and otherwise unconnected retail investor base.
- The framing of the buying campaign in terms of conflict. The online rhetoric is around class conflict, intergenerational conflict, and a David/Goliath battle. They see their campaign not just as a chance to make money but as an opportunity to rebalance the social order.
While this is an extreme example, it does show the power that investing can have and why people should take an interest. Do you know what your pension is invested in? Does it align to your morals? To your appetite for risk? Do you care? These are questions you should be asking yourself.
Getting in on the action
When a stock market story goes mainstream there can be a feeling of missing out. However, buying any one single stock is incredibly high risk and, as this stock in particular surges, you will more likely than not lose your money. Bubbles always burst. This is as true today as it was in the USA of 1929, the UK of the 1700s, or the Holland of the 1600s. Greed doesn’t change.
Familiarity with a company can give a false sense of its risks. If people once owned a Nokia, or shopped in a GameStop, they might feel more comfortable speculating on these firms.
However, when it comes to investing, that’s far from the best choice and there are much better ways to wade into the markets.
Research conducted by Quilter and financial website Boring Money has found that the typical unadvised DIY investor can miss out on up to 11.3% of potential gains a year, compared with a professionally managed and diversified portfolio with a financial adviser to guide them. The reason is that they are prone to some bad investment habits. These damaging habits are:
- Holding too few shares, or being “undiversified”
- A bias towards the UK, ignoring overseas markets
- Lack of diverse asset allocation, using only shares and missing out bonds, property and others
- Overtrading, fiddling around the margins of a portfolio with no clear plan
- Panic selling, bailing out at the first sign of trouble
Investing is powerful, but like most things, it only works for you if you know how to use it. If you wanted to get started investing then the best option is to choose a diversified multi-asset fund. An adviser can help you find something that suits your risk profile, your ESG preferences and more.
The GameStop situation is far from being just about investment, but it is bringing attention to the power of investing. Figures from the Bank of England show that excess savings of about £100bn have been built up by UK households during Covid-19. The temptation for bored people stuck at home to “play the markets” on an app is real, but many will find out to their cost that there is no such thing as free money.