Why first-time traders are a threat to your retirement savings

The large number of first-time investors in Australia has implications for the Australian stock market – and on the retirement savings of older Australians.

Around 435,000 Australians started to trade in the Australian share market for the first time during the past 12 months, according to a new report from Investment Trends.

Low interest rates, volatility in the global share markets centred on medical, tech and fintech sectors, government stimulus and low-cost trading platforms all helped to stimulate the trend.

“Low interest rates make stock investment more attractive,” says Dr Angel Zhong, senior lecturer in finance in the school of economics, finance and marketing at RMIT University.

“Dramatic volatility and the low share prices in the first half of 2020 attracted many young investors. Retail investors are shown by finance research to prefer low-priced stocks.”

First time investors turned to the market on the back of gains made by those who invest in crypto-currencies such as Bitcoin, but also by long-term investors who have shares in pharmaceutical companies and tech companies such as Afterpay.

Read more: Pandemic rises for online shopping; buy now pay later may stick

“The fear-of-missing-out and get-rich-quick are general behavioural biases observed in retail investors,” says Dr Zhong.

“Low-cost trading platforms further fuelled and lured young and novice investors’ entrance to the share market for the very first time.”

The federal government’s stimulus package may have also fuelled the increase, as too, limited opportunities for gambling caused by shutdowns.

“RMIT research shows around the world, countries with government stimulus payments are associated with [a] larger increase in retail trading volume. It appears that government subsidies were spent on share market investing,” says Dr Zhong.

“The RMIT data shows countries with larger gambling revenue prior to COVID-19 were associated with a greater increase in retail trading last year, since investors see the stock market as a substitute for gambling.”

While young investors comprised most of the new wave of first-time traders, many older Australians also turned to the share market looking to shore up nest eggs or recover lost super funds.

Dr Zhong warns that now may not be the best time to dip your toes in trading.

“With the disruptions to the efficiency in the market, older first-time investors may get lost in the share market,” she told YourLifeChoices.

“For instance, the basic rule of share pricing is that the share price should be the present value of future cashflows, and that share prices should reflect the fundamental aspects of a company.

“A very good example is the recent GameStop saga, where the share price of a traditional video game retailer in the US was pushed from $US20 to over $US400 by retail investors who gathered on online investment forums. When a share price is much higher than its fundamental value, it creates a bubble.

“If we have a few more Gamestop sagas, the market will be heavily disrupted and investment principles that once hold will no longer hold.”

Read more: Why does share market performance matter in retirement?

Dr Zhong says the recent rise in ‘social trading’ should be of concern to older investors who can’t afford proper financial advice.

Social trading refers to unmoderated investment advice given on social media platforms such as YouTube, Facebook, Reddit and TikTok.

Many would-be investors have fallen prey to investment advice from strangers and have lost money, to the point where the Australian Securities and Investments Commission (ASIC) has formed a working party to actively monitor social trading.

But even older Australians who didn’t actively jump on the share-market bandwagon could face fallout from the huge number of newbies participating in the market, says Dr Zhong.

“The rapid surge in the young investors’ participation in the share market has huge implications [for] older Australians with super,” she says.

“Super funds invest in shares. The rapid increase in retail trading is likely to bring more speculative trading and day trading to the market. Finance research has found that retail investors tend to make irrational decisions due to behavioural biases. An increasing number of retail investors in the market is likely to worsen stock market efficiency.

Read more: Explainer: ETFs for total beginners

“That means irrational reactions of retail investors are likely to distort share prices and push them far away from their intrinsic value.

Self-managed super fund (SMSF) members and older investors would do well to steer clear of technology stocks at the moment, says Dr Zhong, adding the current trends echo the lead-up to the dotcom bubble in 2000.

“Young investors tend to invest in technology stocks, which is one of the reasons why tech stocks have grown significantly in the recent year. There are a lot of discussions that we now have a bubble in tech stocks,” she says.

“Tech stocks have grown so big that they are now part of the broad market indexes.”

Afterpay is one such tech company that has enjoyed huge gains throughout the pandemic. It has now moved into the ASX200, and many super funds will have your money invested in ASX200 companies such as Afterpay. Should the Afterpay bubble burst and your withdrawal from such stock occur at the same time “you end up losing a great fortune”, says Dr Zhong.

Timing the market has become more important than ever, and it’s a skill not necessarily endemic to first-time traders. Self-managed super fund members are also being warned to keep a close eye on the market right now.

Read more: Timing the share market is hard – just ask your super fund

“There is an increasing trend that people manage their super on their own. The increasing number of retail investors has increased market volatility dramatically. That means market timing skills become very important,” says Dr Zhong.

“For instance, the share price of Gamestop could drop by 40 per cent within 25 minutes, if you were managing your superannuation and investing at the start of the 25-minute interval, you could make a huge loss.”

While older Australians should be wary of the market right now, there is a silver lining.

“Rapid increase in share participation is beneficial to the economy,” says Dr Zhong.

“Share investors provide fund flows to companies that need money to implement project and develop innovation strategies. Greater share market participation facilitates the flow of funds and thus economic development.

“The rapid increase in share market participation highlights the importance of incorporating and enhancing financial literacy in education.

“Investors who are not financial literate are vulnerable to social trading and could incur losses in the share market.”

Are you active in the share market right now? Have you noticed more volatility in the past 12 months? What do you do to ‘stay safe’?

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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.
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