In today’s world, where investing is at our fingertips through online and even mobile trading, you would think it should be as easy as ever to make fast money by investing, right? Think again.
Coming out of the fastest stock market drop in history (February 19 to March 23, 2020), many amateur traders traded in their casino chips for dollars and took to the stock market. With online platforms like Acorns and Robinhood becoming more popular, investing is much more accessible to the masses; but I will warn you, accessibility does not mean it is easy. With thousands of investments to choose from and volatility at extreme levels, I would argue that it is more difficult than ever.
To quote a recent Yahoo! Finance article, “… stock market newbies have created an entire cultural movement with an ’investment strategy’ that looks more like gambling than the traditional buy and hold approach of past retail investors.”
During the Coronavirus market crash and subsequent recovery over the past couple of months, we received more calls than ever from folks eagerly looking to buy into individual stocks. Many were asking for stocks that were trending based on news headlines, like companies selling toilet paper and medical equipment. Others were speculating on airlines, cruise ship companies, or oil. While there is nothing wrong with playing around in the stock market, I would offer a word of caution: if you’re speculating, do not invest anything you’re not willing to lose. There’s a big difference in speculating and investing.
There is a common misconception that when investors lose money in the stock market, it is from a company going bankrupt. In reality, that rarely happens. Most stock market wounds are self-inflicted – caused by investors making emotional decisions and not having a plan that accommodates a variety of possible scenarios. We encourage folks to pick an investment strategy that matches their goals, investment horizon, and risk tolerance, and then stick with it. History shows us that most investors switch strategies at the absolute worst time. Your strategy might not be the best performing strategy at all times, but that’s okay; markets are cyclical. The important part is understanding your strategy, but not abandoning it entirely when you experience turbulence.
Furthermore, by investing in one stock, or even a few stocks, you are eliminating the benefits of diversification and therefore exposing yourself, to not only the risks inherent with the economic system, but also the risks of that particular company. Every day you read of scandals and mismanagement of publicly traded companies, which can cause quick drops in a company’s stock price, leaving overconcentrated investors holding the bag. Whether it is investing in an appropriate number of individual stocks, mutual funds or ETFs, proper diversification can effectively eliminate those company-specific risks.
During my 11-year career, fad investing has come and gone but one thing has never changed, investing in a diversified mix of stocks (and bonds, if appropriate) with a long-term mindset -- not chasing trends & returns – can help you reach your long-term goals. If you need a clear voice to help guide you forward in your pursuit of financial independence, give us a call and see how we can help.