A prominent stock commentator has warned of complacency setting in among retail investors after the spectacular post-COVID share market recovery.
Fidelity International investment director Tom Stevenson especially singled out unconditional optimism as a recipe for disaster.
"Are you becoming more optimistic as the market rises?" he asked in a column on Sharecafe.
"Watch this tendency because the best returns have been achieved by investors who adopt the opposite approach."
He referred to a former colleague who taught junior fund managers "to become more bullish as the market fell".
"Easy to say and very difficult to do," said Stevenson.
"The growing appetite for risk-taking in obscure and volatile assets like cryptocurrencies suggests people are chasing growth. That's worrying."
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Invest when you don't want to
Buying shares when everyone else is selling is the best way to nab returns.
But Stevenson acknowledges this is difficult, even for professionals.
"Are you an emotional investor? This is a silly question. Of course you are – you are a human being."
The way to remove the emotion out of buying is to do it "regularly and systematically", according to Stevenson.
"It makes you invest when you don't want to – invariably the best time to do so."
Have some cash in hand for volatile times
Aside from quarantining enough cash for day-to-day living and emergencies, Stevenson encouraged punters to set aside some capital during the good times.
This is so you can buy up when bad times hit.
"If you were fully invested in March 2020 you would have enjoyed the subsequent recovery – but how much better if you could have added to your investments at bargain basement prices?" Stevenson said.
"Having some cash to hand (separate from what you've put aside to cover expenses) is essential if you are to benefit from Mr Market's mood swings."
How much can you stomach a downturn?
There are many first-time stock investors who are currently experiencing a downturn in their portfolio for the first time.
Stevenson reminded punters accepting the unavoidable share market downs goes hand-in-hand with enjoying the great highs.
But everyone has a different tolerance for volatility.
"You also need to be realistic about what you can, and cannot, live with," he said.
"How well do you know yourself? Twelve years into a bull market, it is tempting to think that we have a greater tolerance for risk than we actually do. You will find out what your real risk appetite is when your portfolio is worth 30% less than it is today."
