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Self-proclaimed social media gurus: Just one of the dangers facing DIY investors

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Intermediaries looking to try their hand at investing shouldn’t start with advice from strangers’ social media timelines, writes Theoniel McDonald, CFP and Managing director of Wealth Associates.

 

You could be excused for mistaking the past few years as the age of DIY investing. Nowadays just about everyone who strolls into our financial advice practice has a self-researched share or crypto asset portfolio. As I interact with these investors and spend time browsing investment-focused social media accounts, I cannot help but recall a story popularised by asset management guru JP Morgan.

Morgan would get his shoes shined every morning on his way to the stock market. One day the shoeshine attendant asked him if he could buy some stocks through Morgan’s brokerage. Morgan politely refused, and when he arrived at the office ordered his traders to immediately offload their stocks. This sequence of events, as legend has it, took place just days before the 1929 stock market crash. Morgan acted decisively because he was concerned about being invested in the market when everyone was getting ready to rush in!

You see, everyone wants to own shares when stock markets are trending higher. Today, a couple of years into a bull market, DIY investors are boasting about their portfolio returns ‘beating’ those of the big asset managers. Social media is the perfect feeding ground for wannabe investors. Armed with share tips from their favourite online community – and clutching fistfuls of dollars courtesy the United States’ loose monetary policy – DIY investors are entering the market in their droves.

In fact, the promise of quick market returns led to around 10% of the US population signing up on US-based online trading platform Robinhood. South Africa’s Easy Equities also boasts more than 1.3 million users, with millions more joining cryptocurrency exchanges. Nothing makes me happier than seeing people excited about investing, but I am concerned about the level of financial sophistication among the DIY investor community.

Many are too easily lured in by the promise of “easy money” being made by the thousands of self-proclaimed stock market “gurus” that have sprouted up on YouTube and other digital platforms recently. Be warned: these so-called gurus make investing sound easy when it is anything but. Nobody knows for sure when the current market rally will fizzle out, but it is clear many DIY investors who bought shares near the peak will suffer capital losses.

The good news is that the average Robinhood or Easy Equities trader, at around 32 years of age, will have plenty of time to recover from a market collapse. Of course, you need not stress too much about market volatility if you implement the following eight tips when building your DIY investor portfolio.

1. Knowledge is power. Arm yourself with all the information you can find and only follow social media personalities who have been successful over longer timeframes.

2. Be realistic about your return expectations. A 200% return over a handful of years during a bull market is impressive; but achieving 15-20% per annum over 15 years, through market ups and downs, is even more so.

3. Develop your own strategy and document this as you go. Your strategy should include reading and understanding financial statements and quarterly and annual reports.

4. Focus on preserving your capital. The price you pay for an investment is critical as it provides a margin of safety when markets dip. Remember, if your portfolio loses 50% of its value it must recover by 100% just to recoup the lost capital.

5. Understand the value of the assets that you buy. If you are investing in something that you cannot value, then you are probably following the herd rather than investing.

6. Resist the temptation to speculate or trade. If you hold positions for less than six months you are probably trading or speculating rather than investing. Time in the market beats timing the market, every time.

7. Diversification is key. Build a portfolio in line with your desired asset profile and pay close attention to how much you invest locally versus abroad, and the mix of asset classes in each geography.

8. Speculate with money you can afford to lose. If you decide to take a gamble on that hot stock or cryptocurrency, please do so with money that you are comfortable losing. If you commit too much of your capital to a speculative investment that subsequently collapses, you will set your overall portfolio back years.

9. Surround yourself with good advisors. You should seek help from people with experience and who have your interests at heart. There are professional investment advisers who are willing to charge for their advice on an hourly basis.

My parting words of encouragement to DIY investors: If you have started an investment portfolio then do not stop. You should keep the momentum going, continue investing through the market cycles and always remain patient, because great returns come to those who wait.

 

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