In the wake of the Covid-19 pandemic, we’ve seen a seismic shift towards retail investing occur around the world. The arrival of lockdowns and government stimulus packages provided investors with an unprecedented combination of time and financial windfall to explore the markets and to buy into the stocks and shares that would begin their investment journey.
However, the months that followed showed that this new influx of retail investors continually traded shares across different markets with increasing frequency.
(Image: Financial Times)
As Financial Times data shows, retail investor interest fluctuated wildly across 2020 and 2021, with the dominant presence of ETFs giving way to travel, growth, ESG, and meme stocks at various stages.
Not only does this show that retail investors can be unfocused in their investment decisions, but the rise in popularity of WallStreetBets favorites like the meme stocks GameStop and AMC, shows that investors are increasingly eager to turn a quick profit.
According to a Natixis report published in June 2021, an expectation gap has emerged between investors and the returns that they hope to achieve on their portfolios. The survey of 8,550 retail investors found that those with more than $100,000 in investable assets largely believed that they could continue to draw on the success of 2020’s stock market rally and post annual returns of 13% above inflation by the end of the year.
In reality, the final quarter of 2021 was a difficult time for global stock markets as record-breaking inflation and fears regarding new Covid-19 variants led to large-scale sell-offs of growth stocks and meme favorites alike.
With this in mind, expectation management is essential for anybody looking to enter into the world of investment. Let’s explore three ways that you can manage your expectations when starting out as an investor:
1. Set Clear Goals
First and foremost, new investors must have an idea of why they’re investing in the first place. If you don’t know what your goals are, how are you going to plan the construction of a portfolio to achieve them?
Although 2021 was certainly the year of the meme stock, it’s worth asking whether buying into sentiment-driven stocks for short-term results is consistent with the things that you hope to accomplish. Building wealth in a measured way with more limited levels of risk means taking a longer-term approach. If, say, you’re looking to save money for a mortgage, this is generally more effective than a more risky approach.
However, if your financial goals are to generate more money for a pension that you can access long into the future, it may be worth taking on more risk and balancing it out with growth stocks. This means that you can attempt to build a nest egg whilst buying into more tried and tested risk averse stocks.
Fundamentally, setting yourself goals can help you to better understand where to look and what stocks to invest in as a means of generating the wealth that you want.
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2. Create a Plan
You’ll also need to figure out a way to manage the building of your investment. By gaining an understanding of how much money you’ll be investing each month, you can better forecast your financial growth.
Many open banking platforms can offer insights into how you can expect your portfolio to grow over the short, mid, and long-term. It all revolves around you sparing only the money you can afford to keep your investments working.
“First, set aside enough money in the form of cash and for investments, emergencies and immediate tasks,” explains Maxim Manturov, head of investment research at Freedom Finance Europe. “Then, you can use the following rule of thumb: subtract your age from 100 and put the remaining percentage in stocks and the rest in bonds. In other words, if you’re 20 years old, put 80% of your assets in stocks and 20% in bonds.”
These plans can help you to invest at a consistent pace that doesn’t negatively impact your daily life. Although every investor is different, plans like the 50/30/20 rule can help to manage your outgoings in an easy-to-follow way. The rule is that 50% of your monthly salary goes on essential expenditure, 30% is reserved for non-essential purchases, whilst the remaining 20% goes on the paying of debt or investments.
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3. Adopt a Bigger Picture Outlook
If you’re new to the world of investing, one of the first and most important things to understand when learning to manage expectations is that stocks can go down as well as up.
When you make an investment, it’s essential that you avoid selling dips and buying peaks. If you’ve conducted your research and bought a stock that you believe will perform well over time, don’t sell it if you wake up to find it down 5%. While it’s important to know when to sell an underperforming investment, it’s generally a bad idea to rotate your wealth between stocks too frequently.
Be sure to adopt a bigger picture outlook that’s consistent with your financial goals. If you’ve bought a stock that you believe will come to fruition over the next five years, don’t panic if it underperforms for a quarter as long as its fundamentals remain the same.
Although the world of investing can seem like a daunting place, it’s the best ecosystem for allowing users to build their wealth–provided that they enter the space with the right goals and expectations for what they can achieve.
Source: credit.com