IN THE NEWS Retail Investor or Speculator? | Develop Your Game Plan for Investing
» Commentary by Chad Warrick and Jason Print, CFP®, Co-Presidents and CEOs | February 8, 2021
Much has been made of the rise and power of a new clan of retail investors. This new type of ‘investor’ has been bred by the pandemic and shutdowns. They have lots of time and extra cash on hand courtesy of government stimulus checks and canceled vacations and activities. When you combine those factors with low to no commission trades, easily accessible trading apps, and a rising stock market, you have all the necessary ingredients for a classic bubble in select stocks.
The past year has seen a boom in individuals buying stocks through retail online platforms. Social Media and message boards platforms like Reddit, add fuel vowing to make money while punishing the bad guys (in this case, the hedge funds of Wall Street). What could be better?
Retail traders are associated with market inefficiency, because they are considered more likely to trade on noise, accelerating surges and dips these individuals are short-term speculators rather that long-term investors. You might equate them to people who bought homes in 2005, with the intent of booking a short-term profit by flipping the home to another investor. The strategy works well when prices rise, and you get out fast enough. If there is little to no intrinsic value in these ‘investments’, there is always a point where eventually the buyers run out of other buyers and the price will fall.
According to the Wall Street Journal, two weeks ago, $22 billion worth of shares changed hands, that’s more than Apple, the world’s largest company, and double GameStop’s market value. GameStop is certainly a classic example of a speculative frenzy. The stock went from single digits to over $400 Per share. Anyone who held the stock for 10 days last week, made 10 times their money. What’s not to like?
Often overlooked in times like these is the relationship between risk and reward. While borrowing money and speculating on options or buying on margin can lead to outsized returns in the short-term, at some point, risk will also show up. It is important to understand the difference between an Investor and a Speculator.
A long-term investor recognizes that even though there are no guarantees on their principal, historically, they enjoy higher returns. They have a better chance of maintaining or enhancing their purchasing power, and they judge it to be worth the risk. A speculator does not necessarily have to wait around for a full market cycle for their profits if they happen to buy or sell at the right time, essentially a gamble.
At Summit, our financial plans are engrained with long-term investing principles. While there will always be new and exciting headlines, we have your financial goals and priorities in laser focus. At Summit, we will help you develop a game plan for investing. We will work with you to separate the investing from the speculating, giving you the greatest probability for achieving your goals. Thank you for your confidence. We do not take it for granted.