Don't Let Emotion Undermine Your Investment Decisions Follow these tips to take advantage of the data and increase your returns.
By Farhana Rahman Edited by Amanda Breen
Opinions expressed by Entrepreneur contributors are their own.
In 2021, there's been a significant surge in the number of people investing in the stock market. Free trading apps, the pandemic, lack of sports and a market that keeps breaking records have all played their part. Additionally, the popularity and influence of meme stocks, such as Dogecoin, and even trading-meme-filled social-media accounts, such as @fomobozos, managed to attract millions of new investors. Many of these newer investors had no prior knowledge of how the markets work, and they witnessed, if not experienced, how quickly money can be made trading the markets.
A recent survey of 1,500 investors suggested that traders don't plan to stop any time soon. In fact, 58% of those who identify as day traders say they expect to trade more as normal activities resume in the post-pandemic world.
The day traders questioned said that their main motivation is to make money quickly. Maybe some will. However, according to a study of 1,600 day traders in Brazil, 97% of those who were active for 300 days lost money. Meanwhile, a study by the National American Securities Administrators Association in 1999 reported that 70% of traders will lose nearly all of their money.
While meme stocks such as GameStop and AMC Entertainment Holdings are still holding significant price gains, these gains are a result of individual investors uniting through social media to take on hedge funds. They are not related to the companies' fundamentals. In fact, prior to the "short squeeze" drama, both companies were in dire trouble, causing hedge funds to close their positions. It is impossible to predict what's next for these stocks; however, recent ratings by Wall Street analysts predict a significant 12-month drop in price for both.
What is certain is that even when the market crashes (as in 2008 and 2020), in the long run, the markets do go up. Between 2010 and 2020, the average annual return of the S&P 500 was 13.6%. Since the beginning of 2021, the index has increased by over 16%.
Long-term investments can offer benefits that day traders may want to consider, and the following tips are worth considering for better investment decisions.
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Understand the benefits of long-term investing
Warren Buffet once said that if you cannot own a stock for 10 years, then you shouldn't hold it for 10 minutes.
Long-term investments benefit from compounding. This occurs when an investment is held for a long period of time, as the return is made not only on the original investment, but also on the new amount that grows each year. Investors who start young benefit most. Making regular contributions will give your investments an even larger boost.
When it comes to the risk of losing money, do long-term investors fare better? The answer is a resounding yes, according to Schroders. The global wealth-management firm published a report in April 2020 while global markets were suffering significant losses, and it showed that the longer you invest for, the lower your chances of losing money.
What's even more striking is that if you don't invest, you will lose money over the long term, given rising costs caused by inflation, which is particularly dangerous for savers in an era of 0% interest rates.
Consider that it's 1980, and you have $10 in your pocket. You're heading out to a movie; the ticket costs you under $3. You've got plenty left over for popcorn and a beverage. You also happened to have an extra $10 in your pocket, which you kept for another trip to the theatre. You found that $10 today and are ready for a night out. The ticket costs $9.50. No popcorn for you! Consider, however, that you invested that $10 in 1980. If it made a 10% return a year, it would now be worth $191.
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Conduct research before making an investment
It can be tempting to impulsively follow investing advice you see online. However, it's recommended to take the time to do some research before you part with your hard-earned cash.
Although many investing resources can be intimidating and require an understanding of charts and financial markets, there are some that are accessible to investors of all levels. TipRanks, for example, enables you to research stocks in a visual way, or simply follow professional analysts with a transparent track record. Rather than expecting you to take a deep dive into a company's fundamentals or technicals, it presents you with data based on what experts, such as Wall Street analysts, are saying about a stock.
It also shows you the performance track record of financial experts, so if you see an analyst or financial blogger recommending a stock online, you can take a look at how well he or she is ranked, to see if this is really the advice of someone you want to follow. Their risk-factor research feature presents insight into the risks that companies report to the SEC. This sort of information is usually extremely difficult for newer retail investors to find, read and make sense out of, but it's easier to digest on a visual platform. The data is for those who wish to research further and get a better understanding of the companies they are considering investing in.
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Emotion is not your friend
Markets will fluctuate. It's a fact of life. Investors who were spooked by the Covid-19 crash of March 2020 (and sold stocks at a loss) lost out big time. If you can't handle watching your holdings fluctuate, then it may be best to consider not watching them at all. Fidelity did a performance review of investors that have accounts with them. They discovered the investors with the best returns were dead or had forgotten they had an account. They had no emotional attachment to their portfolios.
If you do want to keep track, which most investors do, remember that you are investing for the long term, and steer clear from acting on emotion to increase the odds of a more favorable outcome.
