Trading out of boredom?

A Bloomberg article that we found on Yahoo finance caught our attention today and we would like to share a few remarks.

Trading vs Rebalancing

This is not the first time that we've heard about retail investors placing a higher number of buy and sell orders since the coronavirus lockdown started. Most (if not all) of the online brokers serving retail investors have a note on their website along the lines that they are experience a much larger number of customer service requests. In some cases we observed that brokerage websites also showed signs of stress, e.g. some data not updating as quickly as it used to.

So there is some evidence that there are more orders being place, whether that is for stocks or options or other derivatives. We believe that trading, in particular day trading where you start and close a position on the same day, does not fit our investment preferences.

Having said that, we also observed an increase in the number of orders we placed since beginning of the year. All of those orders, however, were to rebalance our portfolio. Based on our data, there were more positions requiring rebalancing due to the significant fluctuation of the stock markets. There were days with declines or increases of 10% and more.

Not all stocks that we own moved to the same degree, though. Throughout the last few months and this is still ongoing to a lesser degree, there is a high uncertainty as to the effect of the coronavirus on particular companies and sectors. Because of this uncertainty, it appears as if "favorites" change within days.

As a result there was an increased need to rebalance our portfolio and keep all positions closer to the target allocation. The upside was that the vast majority of these adjustments resulted in additional gains due to buying at lower prices (the stock was "out of favor") and selling at higher prices (the stock was "in favor"). All of those buy and sell signals were created by our algorithms, so all we had to do was approve the suggested orders.

This kind of "trading" can help to improve the portfolio performance. Our data shows that without those short-term trades the performance would be lower. Still, this is no day trading. There was not a single cases where we started a position then closed it within the same day. Equally there was no case where we traded the same ticker symbol twice on a given day.

Therefore in our view rebalancing helps with performance. However, we are staying away from day trading.

Technology Sector

The Bloomberg article also quotes a co-head of derivatives strategy at a trading firm, referring to "message board trading" when people buy or sell based on whatever they read at a given point in time. He mentioned Apple Inc (AAPL), Stitch Fix Inc (SFIX) and TripAdvisor Inc (TRIP) as affected by this type of "trading".

For day traders it may make sense to look at individual stocks. However, if you take a longer term view then looking into the technology sector may make sense as long-term position in a portfolio. So instead of trying to make money as an amateur day trader with individual stocks it might make more sense to just buy into a basket of companies and keep that investment for a very long time.

Buying a basket can be achieved with exchange traded funds (ETFs). For the technology sector low-costs funds include SPDR Select Sector Fund - Technology (XLK) or Vanguard Information Tech (VGT). There are others more but these are good starting points for further research. In all cases you should seek independent advice. And before making a decision you should definitely also find out the ETF's portfolio, i.e. which companies do they invest in.

Using an ETF also helps reducs the risk that is associated with a direct investment in an individual stock. If the company you pick gets into trouble then your investment is likely to loose quite a lot. That same stock in an ETF is only one of many, at times hundreds of companies, so the risk that is unique to that company has only a very limited impact on the ETF portfolio and therefore price.

As always, do your own due diligence and seek independent advice before making decisions.

References

Article: "Bored Day Traders Locked at Home Are Now Obsessed With Options": https://finance.yahoo.com/news/bored-day-traders-locked-home-152732093.html

Note that we do not receive any compensation for mentioning any product, e.g. ETFs, in this post.