This is a question we get asked quite often lately.
The short answer? Yes, it is easier than ever for anyone to trade. There is a multitude of options available to retail investors who would like to manage their own portfolio. You can also trade currencies if you want to. You can open an online trading account with your bank or any of the other online platforms available. It is easy and has become cheaper over the last few years. So yes, you can run your own trading portfolio…
…but that doesn’t mean you should.
There are two ways that any investment can make money for you – either you will hold a passive portfolio for a long period of time, it may pay you some dividends, but it will also (hopefully) grow in valuation. Alternatively, you can actively trade the assets, buying and selling frequently to make your gains in that way.
Long term share investing
Long term, passive share investors may argue that owning the shares directly is cheaper than doing it via a structure like a unit trust fund or another product, and it gives the owner the freedom to select the particular shares that they are interested in holding. This is correct and for some investors out there, it will hold true over time. If you are the type of investor who can carefully select a share or build up a portfolio of shares over time and you have the discipline (and the stomach!) to hold those shares over the long term through market ups and downs, you can possibly consider holding your shares in a direct portfolio. If you’re not sure whether this is you, ask yourself some questions:
- Will I be upset if I buy the share today at R10 and then hear that I could have bought it yesterday at R9.50? If you are planning on holding this share for the next 10 or 15 years, this should not be the end of the world.
- Similarly, how will you react if you bought the share at R10 yesterday, and it drops to R9.50 today? Again, while this is not a “nice” experience, it is not a crisis for a long-term investor. A long-term investor understands that markets will fluctuate, sometimes significantly, in the short term.
- How often will you be checking the share price? If you are planning to load your trading platform’s app on your phone and check the price regularly during the day, you’re setting yourself up for heart problems. It is only the strongest willed investors out there, who can watch the price actively and not be tempted to take action when there has been movement. Taking action is often the worst thing you can do after a big move in the price. After a drop, you may lose your nerve and sell, just to miss out on the recovery. After a gain, you may get greedy and invest more, just in time for the correction. While no one has ever cried after taking profits, doing it too soon has an opportunity cost.
- Do you know how to read and interpret a company’s financial statements? Long term investors need to understand why a share’s price moved. They need to understand the long-term growth prospects of the company and be able to filter the facts from the noise that we see in the media. If you do not have a good understanding of a company’s financial data, you are unlikely to have an accurate gauge of the company’s financial outlook. Yes, we keep talking about holding shares for the long term, but you have to sell at some stage. If you don’t understand a company’s financials, you will not be able to tell when it is time to do so.
If these questions don’t discourage you, you can possibly consider holding a direct share portfolio. We would still recommend that you get some help from an investment professional. Many stockbrokers offer a joint management option where you can make your investment ideas clear to them, and they can then assist with finding shares that fit into your specific preferred investment strategy.
Share or currency trading/speculation
Actively trading your own portfolio is a whole different kettle of fish. Here we want to strongly caution readers against taking on something that can wipe out your capital in the blink of an eye if you get it wrong.
There may be the odd person out there that has a natural talent for trading and who may be able to do it successfully on a part-time basis, but in general, this area is reserved for the pros. We have seen it go wrong too many times – clients trade on a demo account (a fictional account that the online platforms offer their users to practise on) and after a few successful practice trades, they feel they are ready to start trading with their hard-earned savings.
There are so many reasons why success on a demo account will not translate into profits in the real world:
- Psychologically, things change when you are making decisions that can really affect your finances. It is easy to be objective and clinical when you are making buy and sell decisions on a demo account – there is nothing at stake. When your life savings are in the balance, fear and greed get the best of us and cloud our decision making.
- Demo accounts often offer unrealistic amounts of capital for you to play with. If you only have R20 000 to invest, you should only practise with R20 000 in your demo account. I also strongly recommend that you practise for two or three years (yes, years) before moving to a live account. It is easy to make money when sentiment is strong and markets, in general, are moving up. It gets much harder when the outlook is not that clear and you need to carefully pick the winners from the losers. Trading on a demo account for a few months will not teach you this.
- Margins, leverage, swap rates and commissions are sometimes different in the demo account vs the live account. (Honestly, if this is the case on your demo account, you may want to consider a different provider before you even get going.) Make sure that you check this before you start trading live. If you don’t know what margins, leverage, swap rates and commissions are or how they work…well then you can be assured that live trading is not for you!
You have to ask yourself what you want to achieve. If, like most of us, you are just trying to save for a comfortable future, there are safer ways to do it than trying to manage your own share portfolio. Using a professional stockbroker could be a good start if you are really passionate about stock markets, but for most investors out there, some good old unit trust funds will do the trick. Let the professionals make the calls on the right mix of assets (remember there is more to investing than shares), which regions, which currencies, and everything else that is so important to long term wealth creation.