I was recently talking to a middle-aged client. He has been with me for a few years and I have done his full financial planning. And credit to him that he continues to implement the plan in spirit and has faith in my abilities. 🙂
But like most people these days, even he is working from home. And like many others, he too is getting restless with the monotonous routine of WFH and lack of freedom to move outside at will. As a result, he got interested in day trading. And wanted to know my thoughts on it.
I listened to his logic, which was something like this: He would continue to invest regularly as per his customized goal-based financial plan. But wanted to use some money leftover to try out his hands at day trading. And it’s not like he hadn’t tried it earlier. He had. But it was just that once the financial plan I made was implemented, he never felt any need to do anything outside the plan.
But these times are unprecedented and people have this pent-up urge to do something (due to lockdown). And hence, he wanted to try it out.
I said that as long as this did not interfere in the over plan and as long as he understood the risk and limited his exposure, he could try it out. Nothing wrong in trying something out.
Why am I telling you this?
Because this trend is catching. More so in the last few months when people around the world have been sitting at home (mostly).
In the last few months, you would have read (in articles like this and this) about how young people, sitting at home, wanting to ‘do something novel’ are trading. Part-time day trading from home is becoming a global craze. And this is happening in India too.
But can money be made by day trading?
Yes. It can be. Many of my friends do it.
But can it be made by everyone?
No. It is not for everyone. And it can be risky if you don’t know what you are getting into.
But discussions about risk aren’t appreciated unless something blows off in the face. During normal times, people are only bothered about the potential of high returns. But it is only when things turn really bad that risk-related discussions come on the table.
Everybody wants to get the safety of Fixed Deposit and returns of Equity. 😉
But that’s not possible. You can’t have everything in life.
If you want higher than the risk-free rate of returns, then you will need to take risks. It doesn’t matter whether it’s knowingly or unknowingly. You will have to.
Talking of risk, these days it’s quite normal to throw around terms like risk appetite, risk capacity and risk requirements in discussions of investments. And at first glance, all three look similar and interchangeable in regular vocabulary usage. But in reality, all 3 are very different dimensions of risk that make up your real Risk Profile – which is what should be used to decide your investment decisions. Not just your risk appetite, but the full risk profile which is made up of risk appetite, risk capacity and risk requirements. Do read where to invest based on risk appetite?
In good markets, people overestimate their risk appetite. But when the markets fall (or begin to fall sharply), most so-called aggressive investors forget everything and seek comfort in a conservative portfolio. Same is the case with something like day trading. You will love it when the going is good. But will you know how to handle your trades and more importantly, yourself when things don’t go your way?
It is for this reason that it’s always advisable to understand your risk profile first. And any properly-executed risk profiling exercise will consider investor’s willingness as well as his capacity to take risks. A mismatch between the two will lead to a build-up of stress between the investor/trader and his portfolio.
If you are unsure of your risk profile or you are having second thoughts about how you will manage your investments/trades when things go a bit out of hand, then it makes sense to talk to a good investment advisor.
And having worked with so many people, I have come to realize that most of them are attracted towards picking next hot stock or to earn tons of money by day trading. But that doesn’t happen so easily.
For most people, there is something which is more important than stock picking. Having the correct asset allocation is key to properly manage your wealth. And sadly, most people don’t understand this. Asset allocation doesn’t get the importance it deserves. Most investors think that asset allocation is an academic topic. It doesn’t impact them. But in reality, that is what impacts 90% of their wealth! Even more.
Following proper asset allocation is extremely important to meet your financial goals on time.
And if you don’t have the confidence or clarity about whether your investments can help you achieve your goal in your chosen timelines, then what is the point of investments or trading? Think about it. Money should make your life predictable. And if picking the right stock or day trading doesn’t help then there is something amiss. And that is that you need to invest the right amount and have the right asset allocation. For most investors, correct asset allocation will do the heavy lifting of your financial life. You may not agree to this or you may not know this. But this is a fact.
So go ahead and do individual stock picking. Or try out someday trading too with a small portion of your money. But be objective about self-assessing your performance. If you are doing good, then continue. But if you aren’t of if you are not sure, then maybe its time to think about it again.
Some people will make a lot of money from day trading. Some people will make a lot of money from direct stock picking. No doubt about it. But for a large majority who neither have time or want to put in the effort required, it is asset allocation that will make truckloads of money for them over the long haul.
So all said and done, don’t think that I am saying that you shouldn’t take any risk at all. You should. You need to. But know what you are getting into. And if you have to try something risky, limit your exposure to a very small part of your portfolio first. Else, keep things simple. Get yourself a solid financial plan that you can stick with and that increases the probability of your real-life goal achievement. (Remember that’s what money should do for you). Do not try to time the market but don’t be blind to what’s happening around you too. There are strategies that can help you manage your portfolio asset allocation smartly.