Investing in the stock market has never been so popular. Companies such as Amazon and Tesla perform so well that many believe investing in the stock market is easily profitable. For instance, investing £100 in these companies in 2019 would have yielded a 700% return in 2020. The truth is that investing in the stock market only seems easy in hindsight. It is actually a profession in its own right, and requires knowledge, strategy, money, patience and luck. This is why the wealthy usually delegate the management of their portfolio to professionals.
Therefore, is it possible to invest (successfully) on the stock market without formal training?
How to study the stock market
One might think a master’s degree in finance necessary. However, these degrees are not designed to help you invest your own money, but rather to apply concepts in the professional world. They teach you everything you need to know before graduating and joining a company. Master’s in asset or portfolio management are the degrees that come closest to the reality of investing in the stock market. But their content is business-oriented and will only help you manage your clients’ money, which is very different from managing your own.
These degrees are also very theoretical and usually explore topics such as accounting, financial management and capital markets. Despite showcasing case studies and offering practical exercises, the only real practice you will get is during an internship.
For these reasons, academic training is not the best way to get you acquainted with the reality of financial market, simply because it does not teach you the basics you need to master in order to be successful. Not to worry though, there are other ways to get you started…
Hiring a professional
If you lack the time, skills or energy to manage your portfolio, it is best to hire a professional. However, you need to be vigilant when doing so, and factor a number of things.
1. Performance
When hiring a professional, you expect them to be “better” than the market. Unfortunately, this is not always the case. For instance, if the European market makes +20% over the course of the year and your manager has selected securities that have made less, then they have underperformed. This scenario is quite common so choose wisely.
2. Research
You may be familiar with this famous experiment. Researchers let monkeys select stocks in a portfolio and compared these stocks’ performance with those selected by managers. It seems that the monkeys’ random and uneducated choices performed better than those of the managers. In fact, studies have shown that while managers may outperform the market for a period of time, they always perform worse than the market in the long run. This does not mean that they are no good, but they have several management constraints that weigh on their performance, such as regulation, risk and liquidity.
3. Costs
Finally, always pay attention to costs as they can be quite significant in the long run. Of course, it is natural to pay whoever takes it upon themselves to manage your investments. It is a job, after all.
But, considering the factors explained above, it is in your best interest to calculate your return on investment (which includes management fees). These costs can weigh heavily on long-term performance, as demonstrated by numerous studies.
Investing in the stock market autonomously
We now know that trusting a professional with your money has its drawbacks. Ideally, everyone should be able to invest part of their savings in the stock market on their own without formal training. Much like driving or swimming, everybody should learn how to do it, and sooner the better. Knowing how to manage and invest your money is both your responsibility and your duty.
In order to do so successfully, and like any other skill, you have to learn and practice. Theoretical knowledge through books and websites will only get you so far. You need to practice and can even get help from mentors and coaches.
Your end goal should be to manage your stocks independently, by forging your own opinions and developing your own strategies, without having to rely on professionals or external analyses.
Formal training in finance: yay or nay?
Investing in the stock market is a personal activity and responsibility. Unfortunately, there is no formal education available for it (in the UK anyway). Our education and higher education systems are designed to help people work in a specific field, earn a salary and consume goods and services. In this respect, investing in the stock market is a little off the beaten track. If this is what you want to do, you need to take a serious interest in it and train as much as possible. Not only that, you need to take other factors into account, such as costs and taxation which can weigh heavily on your strategy and your performance.
In conclusion, investing in the stock market without formal training is quite feasible. However, trading must remain a pleasure, dare we say a passion, so be careful not to let it burden you or cause any stress. If it does, you must delegate to a professional.
