Why investors shouldn't bottom pick to beat the stockmarket

By Dale Gillham. Published at May 22, 2020, in Investor 101

In my report two weeks ago, I highlighted some alarming statistics released by ASIC on investor behaviour in the wake of the coronavirus crash.

At this time in March, the stock market was extremely volatile.

In the report, ASIC indicated that new account openings for retail investors were up 3.4 times on previous levels. In addition, there was a marked increase in the number of reactivated dormant accounts. ASIC also reported that there was a sharp increase in retail investors trading short-term highly leveraged markets.

This week BetaShares released its Exchange Traded Fund (ETF) review for April 2020 and, not surprisingly, it reported similar statistics with investors trading ETFs.

The report states that in April investors invested more than $1 billion in new money into ETFs.

It also highlighted that “trading volumes remained very high in April, albeit significantly lower than the all-time record of $18 billion set the month before”.

As you can see, these statistics are consistent with what ASIC previously reported.

Right now, those who invested in ETFs have been rewarded for their decision as the market has risen around 10 per cent since 1 April, although most of that occurred in the first seven days, so those entering after this period have not done as well.

That said, in my opinion, the decision to invest during this time was very premature, as the market was uncertain, very volatile, and extremely dangerous.

The concern is that these statistics highlight two themes that happen consistently with retail investors.

The first is that investors have not learnt and are still attempting to grab a bargain in the hope of making a profit. While this has worked for them so far, depending on how the market unfolds, this may not be the case in a few weeks or months.

The second, and more important issue is that when investors profit from their decisions it creates a false reality, as the majority do not realise the ramifications of their decision to invest.

Given this, they will, once again, attempt to bottom pick in an effort to beat the market, but history dictates that retail investors get it wrong more often and, consequently, lose a lot of money.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au

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