Asking what hot stocks you should invest in? Ask these five questions instead

It seems that almost everyone is investing (or thinking about it!) since COVID-19 and it’s not hard to understand why. Bank interest rates remain at an all-time low, there are perceived opportunities for growth in the market and it’s getting easier to invest, with options now available online with a few clicks of a button.

With this increase in interest comes a lot of chatter about stocks, what’s ‘hot’ and when might be the right time to buy in. We’re also surrounded by media headlines and clickbait titles in the media on the same topics. For many – if not most – Australians, the ‘hot stocks’ may be interesting, but these stories probably shouldn’t be guiding the way you invest. In fact, ASIC and the Reserve Bank issued warnings last year to new investors who were trying to ‘play’ the market.

Instead of asking questions about particular shares and specific timeframes, there are far more effective questions that will better establish and guide your investing journey.

So, if you’re speculating on which exchange-traded fund (ETF) or individual stock might do best in 2021, here are five questions you could consider asking instead:

How much time do you want to spend managing your own investments?

This will influence whether you invest directly in shares or seek professional support to do so. These days, there are different options available to you, whether it’s a financial adviser, a micro investing app or using an online investment service, sometimes called ‘robo’ investing, which automates much of the set-up and ongoing management of your investing.

Do you believe that you can beat the market long-term when most professional investment managers can’t?

This leads on from the previous question. For those who are going to actively invest directly in stocks, you need to know you not only have the time required to closely monitor them and make adjustments as required, but also the required knowledge to choose and change stocks. But it’s worth knowing that the majority of active fund managers are unable to match the performance of their benchmark index over time.

Are the investments you’re considering properly diversified?

Across different asset classes and geographies, not just across a handful of individual stocks? Diversification is critical to a successful portfolio and needs to be one of the fundamental aspects you consider when you begin investing. If you’re not sure, again, this may indicate that you’re better off seeking advice or investing in something like ETFs that have a level of diversification built in.

How would you respond if the market value of your investments fell significantly?

If you think you’d find it hard to watch your portfolio fluctuate up or down, this may determine how much you invest, what you buy and perhaps if you should even invest at all. The best investment strategy is a well-diversified, passive and long-term strategy – so you need to have the staying power, even when the market wobbles, rather than pulling your money at the slightest market fluctuation and risking a massive loss by doing so. Online investment services that provide education and communication can help you learn more about the way your behaviour can affect your investments, and this is one of the important benefits they can provide.

What’s your investment timeline?

What are you saving this money for and when will you need to access it? If you have a short-term time frame, you need to be sure that your risk profile matches your goal. For most people, investing success comes from long-term commitment, not short-term gambles.

The reality is, most investors are likely to be better off sticking to a well-diversified portfolio of exchange-traded funds, rather than trying to pick and choose stocks in a way that has more in common with gambling than it does with investing. So by all means, read the clickbait stories and chat with friends about what investments are ‘hot’, but know that there are lots of other great questions to inform the way you consider investing.

 


Erika Jonsson is part of the team at Six Park online investment service. Six Park uses technology to provide world-class, stress-free investment management without the high costs. The Six Park Investment Advisory Committee is made up of some of Australia’s most respected financial minds, including former Australian Finance Minister Lindsay Tanner.

 

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