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Pattie Lovett-Reid: Novice investors, this blog is for you

Pattie Lovett-Reid: Novice investors, this blog is for you
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For those who lost a lot of money trying to ride the GameStop bandwagon, and those who are afraid of doing the same, CTV News Chief Financial Commentator Pattie Lovett-Reid shares the advice she gives new investors. (MayoFi / Pexels)

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HUNTSVILLE, ONT. -- Momentum is an interesting concept, and was on full display when millions of young and potentially first-time investors poured money into "meme stocks" like GameStop. Some were purely trying to stick it to Wall Street, tired of the concept "Wall Street always wins" while others had wild ideas of making tons of money.

Both groups had likely done little or no research on the actual company GameStop before they decided to invest. I m sure some did and may have made money, but many didn t and a lot of money was lost by hedge funds, as well as by the novice investors who bought in high and sold out low in an effort to try and time the market.

Here are some of my thoughts to consider before you invest:

This may sound boring to some. However, for others who lost a lot of money, it was a lesson learned the hard way.

A quick recap of what happened: The stock did go up like a rocket over an incredibly short period of time - from US$39 on Jan. 19 to its peak of $347 on Jan. 27. Today the shares have slid all the way back down to $40.59.

Here is my concern: trading platforms are not video game apps. There is real risk and the potential to lose money -- a lot of money -- if you don t treat the investing process with the respect it deserves.

I reached out to Doug Allan, who has written a booked targeted to younger investors called "A Fighting Chance Finance: The high school finance education everyone deserves". He tries to give young investors the tools they need to do proper due diligence and really get to understand the financial position of a publicly traded company. The book includes demystifying financial terms, how to read financial statements and even explanations of macro trends in the economy and how they can impact a companies performance and outlook.

You might still be tempted to jump in on the next big trend, however, it is important to note that it is extremely difficult to beat the returns of the overall market through an active trading strategy.

In Allan s book, he references the $1-million bet famous investor Warren Buffett made in 2008 with a hedge fund manager that a low-cost S&P 500 index fund would fare better than a collection of a hedge funds with active trading strategies and high investor fees. Buffett won the bet, proving that boring long-term investing in diversified portfolios is the way to go.
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