Ever thought to yourself, “I should have bought those shares - I could have sold them this week and made a profit”? Me too. It’s easy for retail investors to get tempted into short-term trading, or “day-trading”, especially in times (like now) of market volatility, in combination with low interest rates offered by traditional bank accounts. However, most experts say retail investors shouldn’t try to beat the market.
There has been a sharp increase in trading by new and dormant accounts on the NZX, with the exchange struggling to cope with high trading volumes at the height of the 2020 lockdown. Retail investors are trading more frequently - indicating that investors may be attempting to profit from buying and selling around short-term price movements. However, the FMA cautions new investors against piling into the NZX, on the back of a report released by Australian counterpart ASIC on the volatility of retail investor trading.
Short-term trading can be a major risk for investors, with the potential for significant losses in volatile markets. The ASIC report warns that even market professionals find it hard to ‘time’ the market in a turbulent environment. “For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families.”
In markets where prices can change by the minute, short-term price movements can be unpredictable and almost random, meaning short-term trading involves similar risks to gambling. Only in the longer term do price movements start to indicate a trend.
A more effective strategy can be to focus on value trading, by considering the potential value of shares, in addition to their market value. This way, you can take opportunities to buy shares that the market is underestimating, but still hold tangible value and are likely to increase in value over time. Value investors believe markets that trade continuously often overreact to bad news, resulting in share price movements that do not correspond to a company's longer-term value. Equally, the market can overinflate the value of shares, leading to increased volatility. Value investors do their research and tend to favour long-term investments in quality companies. Holding shares for the long term enables price fluctuations to smooth out.
If you’re a retail investor looking for a market designed to support longer-term trading decisions, rather than trying to beat short-term volatility, then consider diversifying your portfolio to include value investments in Kiwi companies. Catalist offers primary and secondary market trading in New Zealand’s small and medium-sized businesses, focussing on longer-term value. Periodic auctions bring buyers and sellers together at regular intervals, smoothing out some of the volatility and encouraging a focus on the long-term performance of businesses.
By Michelle Polglase