The stock market had a volatile ride during 2020, and will be much the same during 2021 – and newbie investors should be wary of “putting all your eggs in one basket”.
Investing in a single stock can be a risky strategy for inexperienced investors, and even companies that are performing well now may not be doing so down the track.
Finder’s newly released State of Investing 2021 report looked at five of the top-performing stocks of 2015 and found you would have very different returns depending on which stock you had invested in.
Those who invested in mining or resource companies would have done well, while certain pharmaceutical companies would have seen your money go backwards.
“Of these stocks, two have seen tremendous growth over the past five years (Northern Star and Evolution Mining), one has seen strong growth (Domino’s Pizza), and two have declined (Blackmore’s and Mayne Pharma Group),” the report said.
If you had put $1,000 into Northern Star Resources in the beginning of 2016, you’d have $3,760 as of January this year.
Similarly, $1,000 in Evolution Mining would give you $2,240 today.
Meanwhile, $1,000 in Domino’s Pizza would only see your investment increase by $440, and investing in Blackmores or Mayne Pharma Group would have seen your $1,000 deteriorate into a mere $330 and $250 respectively.
“The analysis emphasises the importance of asset diversification for long-term returns, and just how tricky it can be to predict the ‘winners’ ahead of time,” the report said.
In contrast, many exchange-traded funds that tracked a major index performed steadily and strongly across 2015 to the end of 2020.
"Index funds are a great way to minimise your risk while still realising some benefit of shares that rise in that index," said Finder investment expert Kyle Purcell.
Be sure to do your research before choosing an share trading platform, she added.
"Consider brokerage fees, introductory deals and all other costs for the kind of trading you will be doing and go with the one that is best for your personal situation."
The report comes amid mounting interest in investing, with retail investors flexing their newfound influence in the share market such as through the GameStop saga. New users of retail investment platform eToro users also increased by 427 per cent globally during the first four months of 2020.
Trading decisions should be made carefully, said eToro CEO Yoni Assia.
"Is it without dangers or risks? No," he told Yahoo Finance US.
"Some stocks are incredibly high risk at the moment, and we're urging our users to be cautious and to not simply invest in a stock just because it is going up," he said.
"We work to educate our users to be cautious and remember the basics of investing: diversify and only invest in markets and instruments with which you are familiar."
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