The Australian Securities and Investments Commission (ASIC) released a paper last month warning of the risks of day trading stocks. They did this a result of seeing a huge rise in short-term speculative trades since the increase in market volatility in March.
The ASIC analysis found that “Trading frequency has increased rapidly, as has the number of different securities traded per day, and the duration for holding the securities has significantly decreased: indicating a concerning increase in short-term and ‘day-trading’ activity”. They went on to say, “We found that some retail investors are engaging in short term trading strategies unsuccessfully attempting to time price trends”.
Perhaps this paragraph from the analysis tells you all you really need to know “The analysis suggested few pursuing quick windfalls were successful. During the focus period, on more than two-thirds of the days on which retail investors were net buyers, their share prices declined the following day. On days where retail investors were net sellers, their share prices more likely increased the next day”
We all know it, yet ASIC felt compelled to point out “Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge”.
We know what the amateurs have been doing, perhaps due to the absence of sport to punt on. Professionals act differently. Francyne Mu, Portfolio Manager and Research Analyst for the Franklin Global Growth Fund, told us in our recent webinar that they had made very few changes to their portfolio in recent months. Franklin take a long-term view and are confident the businesses they are invested in are well positioned for the future. This strategy and discipline has proven successful as they have outperformed the market over all time frames. In the three months to 31 May 2020, the time period that ASIC suggests most retail investors were losing money, the Franklin Global Growth Fund was up by 6.3%.
They didn’t change a lot, they stuck to their strategy and investment philosophy.
We sometimes feel like it’s boring to roll out the refrains of ‘stick to your strategy’ and ‘stay the course’. However, over the long term it works.
The AAN investment committee has also only made a few changes to clients’ portfolios in recent times. These changes were made based on a clear investment philosophy and with a focus on reducing risk rather than necessarily trying to increase return. The key changes in late March were to reduce the exposure to corporate debt, due to impending economic challenges to many in the corporate sector, and to add currency hedging to 50% of international equities.
Professionals are not idle. In times of volatility they increase their focus on sticking to their fundamental investment philosophy. A lot of the work has been done prior to the market turbulence. There is no need to day trade.
That’s the professional advantage.
For the link to the paper click here.