Since the rise of the Covid-19 pandemic, businesses across all industries have pivoted to work through unprecedented times and changing markets. Despite the negative impact the pandemic has had on the economy, it has been a learning period for many resulting in many permanent positive changes. One of those changes was an increase in the number of individuals who want to take control of their financial freedom.
Over the past two years, retail investors made up about 25% of total stock trading activity, up from 20% in 2020 to 10-15% in the previous decade. And they aren’t all looking for meme stock and crypto. A new generation of young retail investors is buying stocks with the goal of becoming long-term market participants.
What is a retail investor?
Retail investors are non-professional individuals who invest their money independently or through brokerage firms. The engagement of regular investors in Canadian and American financial markets has recently increased.
When it comes to investing, retail investors must keep a few things in mind. Because the majority of them lack professional working experience in portfolio management, they must conduct due diligence and test the waters before committing. As a retail investor, we’ve outlined some key factors that you can do to help make wise decisions and maximize your investment. We will also discuss the role of precious metals in a retail investor’s portfolio.
Set a financial goal.
Investing without a financial goal is like navigating a ship without a compass. Financial goals serve as the blueprint for your investment and assist you in determining which investment options you should pursue to attain them. Are you investing to contribute to a nest egg? Is investing a way to generate passive income and grow your wealth? Do you want to prepare for retirement? You must invest based on your objectives and the quantity required to achieve them.
Divide your objectives into three categories:
Short-term goals include time frames ranging from six months to a year. These objectives could consist of taking a vacation or establishing an emergency corpus. You could consider investing in liquid funds or bank fixed deposits to address short-term aims.
Medium-term objectives are expected to be met in three to five years. These objectives could include saving money for a down payment on a house, or saving towards a post-graduate degree.
Long-term goals are at least 15 to 20 years away, if not more. These objectives include children’s higher education, retirement, and so on. Retail investors can meet long-term goals by investing in pure, which have the potential to outperform inflation in the long run.
Retail investors often start with a modest amount or even use a practice account, especially if they’re new to investors.
Recognize Different Financial Products
Before investing, you should research various financial products and understand their functioning mechanisms. This allows you to determine whether the product aligns with your risk tolerance and investment objectives.
Recognize that each financial instrument is unique and serves a specific purpose. To make an informed decision, you must obtain a 360-degree perspective — it is always good to consult a licenced professional and read reputable publiocations to get professional insight.
Diversify Your Assets
Diversification is a fundamental investment principle. To provide your portfolio with the much-needed balance, you must diversify optimally, and many seasoned investors turn to precious metals to achieve this. Diversification allows you to take advantage of various financial instruments and asset classes. Precious metals in the form of bullion and mining stocks are an efficient and effective way to diversify a portfolio.
If retail investors solely focus on one asset class or financial instrument, their portfolio becomes concentrated. If the asset class fails to meet expectations, portfolios can suffer greatly. As a result, the goal should be to diversify your investments across several asset classes to reduce risks while preserving rewards. On the other hand, It is also critical not to over-diversify, as this dilutes returns and makes a portfolio obese — also known as “diworstication,” it was initially identified as a company-specific problem in Peter Lynch’s book, One Up On Wall Street (1989). Since then, the term diworsification has evolved into a buzzword used to characterize ineffective diversification as it relates to a whole investment portfolio.
Avoid the Herd Mentality.
Herd mentality is prevalent and sometimes challenging to avoid. It is important to note that investing is not one-size-fits-all. Every person has distinct financial goals, risk tolerance, and cash flow.
Remember, what works for others may not work for you. If you notice that everyone is following a particular stock or fund, resist the urge to follow suit until you are confident that the investment would align with your investment goals. Research and logic combined with discipline can help you avoid herd mentality.
Base your decisions on research and data
Some retail investors base their decisions on emotions while investing, which they later regret. Sometimes the urge to splurge can take precedence during a bull market, resulting in retail investors buying at high valuations. On the other hand, many investors panic and flee the market during a bear market. Both moves are unfavourable. Don’t lose you lose sight of the big picture.
and staying on track to financial independence. The key to success with them is to understand your objectives and risk profile before diving in. Before making any significant investments, ensure to perform your due diligence or consult with a licenced professional. And regardless of how the markets are performing, a good rule of thumb is never to invest more than you can afford to lose.