Monday, January 23, 2023

Time for new investors to take an old approach

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Burnt by big tech, let down by meme stocks and left shivering in the depths of the crypto winter: many new investors, particularly young people, are now sitting on sizeable losses. Losing money should not mean losing faith in investing. It should mean turning to steadier and more proven, if less flash and get-rich-quick, investment strategies.

Anyone who bought the pandemic dip could be forgiven for thinking investing was easy. Rising inflation and interest rates have since spoiled the party. Regulators did not intervene as traders piled into unregulated cryptocurrencies, and were late in bewailing the gamification of the investment industry. UK watchdogs warned trading apps to avoid the use of points and celebratory messages to goad punters into making risky bets.

All of this short-term speculation has more in common with gambling than investing. Attempting to get rich quick rarely pays off. But low levels of financial literacy, the paucity of investment education and a growing “advice gap” make it harder to find an alternative.

Fintech may help nudge people into making better financial decisions in future. But this will take time. So this holiday season is a good time to make the case for “getting rich slow”: practised investors should strike up conversations with less experienced relatives, friends and colleagues about their investment journeys. They may have rushed into investing, but at least they have overcome the biggest barrier — getting started. If they have regrets about losing money, reassure them that every investor makes mistakes.

The trick is learning from these. Single-stock exposure will probably have already taught new investors painful lessons about the need to diversify, an adequate cash emergency fund and finding a comfortable level of risk.

But a shift from chasing short-term gains to building long-term wealth requires a multipronged approach. Few people on TikTok extol the virtues of making the most of “free money” from matched company pension or 401k contributions. Trading apps are well and good, but more significant are the huge tax advantages of investing using stocks and shares Isas in the UK, or Individual Retirement Accounts (Iras) in the US.

As for what to put in these, single stocks have their place but limiting them in portfolios makes sense. Eschew online stock tips, and invest time learning about the basics of valuation, the power of compound interest and reinvesting dividend income.

Funds can offer a more balanced approach. Automating a regular monthly investment into a plain old global equities index fund might sound boring — but boring can be good. Making regular contributions to investments beats trying to time the market. Taking a long-term buy-and-hold approach using cheap trackers could save a fortune in fees, which act like a tax on investment growth. Plus a growing body of research shows the majority of actively managed funds underperform their nearest passive equivalent.

Now for a reality check. While 2022 was a challenging year for investors, there is every possibility 2023 could be even worse. That ought not to spark panic. The financial odds are stacked against the young in many ways, but as investors, the greatest advantage they have is time. If markets fall, they will be buying stocks at lower prices, and their long-term returns are going to be higher decades into the future.

That is worth remembering when the temptation strikes to sell up or abandon investing altogether, which would mean missing out on the rebound — whenever it happens. The new year could be the time to learn about a new way of investing. Have faith that the long-term rewards will be worth it.

Numisteamone

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