Millions of people are jumping into the stock market. We are here for this. It seems easy. It can be fun. Isn’t it for everyone? Also, you never know when you can take a little game money, trade a hot stock and double it.
But your real money? That long-term, easy-life, leisure-where-when-you-want-money? This is our fair complexion. Buying in the whole market, setting goals, saving easily – these are good investments. It won’t make you a millionaire overnight. But it can probably help you become a millionaire in your lifetime.
We asked Dan Egan, VP of Behavioral Finance and Investing in Betterment, to comment on the long-term effects of investing in entertainment and how to find out if it’s right for you.
What happened to Gamestop? What is the broader trend of the game here?
And: The assembly and collapse at GameStop basically hit all the classic notes of a bubble and explode, with some added intrigue around short squeezes.
To understand the specifics of what happened, start with this New York Times article: “4 Things to Know About Gamestop Madness.”
If you are interested in exploring some of the psychological aspects behind investor behavior, I would like to ask “Memestones: What’s Different in This Market?”
What is “entertainment investment” and how is it likely to evolve in the future?
And: It is investing itself in entertainment, stimulation or excitement, eliminating monotony. It’s not about long-term growth in the economy, or unrestricted cash flow. It’s about having new stock, or seeing huge activity in your account and being able to talk about it with other people.
Dave Portnoy, founder of Barstol Sports, has a reason to come into day-trading: the excitement of win-loss, the ability to shout at referees and regulators, no matter how young we are, we can all access and play. And finally, don’t forget: the thrill of making money and losing it.
How do internet and social media change investment?
And: It speeds up everything, usually not in a good way.
The capital market is already working in milliseconds. Professionals analyze news, analyze and work by algorithms faster than any human.
Social media and ever-running news means you hear the news faster than ever before, and there’s more variety in what you hear. Conspiracy theories and misinformation spread faster than disturbing truths. Once you show interest in a stock, your Facebook, Twitter, YouTube, and TickTock accounts will double on that content, expecting you to keep a few more seconds, some more ads. This reduces the diversity of your perspective.
Thus, social media encourages large, scattered groups to adjust to a stock or issue, giving it a sense of grassroots movement. This means that higher prices and short-term volatility are more likely to occur, especially in companies that interact with consumers.
This dynamic has always played out in the market – it’s not new. Now we have increased their speed through the internet and broken social networks.
How is the investment industry changing?
And: For the last 40 years there has been a consistent trend towards consumers paying less and less for business, investment management and so on. That trend has recently crossed a tipping point, with some consumers paying বাণিজ্য 0 for trade commissions, $ 0 for investment management, or $ 0 for advice.
Most people prefer free, so all the companies that trade for free have increased dramatically in recent history.
Of course, those companies are still paying, not directly from the general investor.
Free trading services often make money by sending your trades to people who pay to trade against you. These are high-frequency trading shops, hedge funds, etc. When you sell a share for .9 99.96 and a buyer pays $ 100.00, these brokerages get $ 0.04. This is called ‘spread’. Do it billions of times and you can see how they make money.
So, they want users to trade a lot. They want users to trade stocks with larger spreads. And as users make or lose money, they don’t care. Users will win as long as users trade. Users are gravy.
So it still costs you, but you can’t see how much. You can easily compare trade fees, but not the spread you provide.
Good investing is easier than ever before: minimal, low cost, easy to diversify, and the markets are reasonably well regulated.
Bad investing is easier than ever: you can access leverage, derivatives, and leverage to buy speculative, centralized assets that you don’t actually understand.
How will these recent investment trends affect long-term investors?
And: In most cases, positively. Achieving exposure to real economic growth is easier than ever. Having a broad-based, diversified portfolio means that when a new company gains ground, you have already invested in it.
That’s part of why Betterment invests outside the S&P 500: a diversified portfolio with a mix of stocks and bonds and international exposure helps reduce risk.
Has something like this happened before, and what has been the impact?
And: Yes, bubbles – and bubble popping – happen all the time.
They all have slightly different tastes: 2001 was the real technology / internet bubble popping, 2008 was based on leverage in the housing market, and so on.
The biggest difference between any two stock-market cycles is whether it affects the real economy, usually through de-leveraging. The stock market can crash without impact on the real world economy because the value of all assets is low. But when that low valuation becomes deliverable and bankrupt, the real-world is affected and it gets dramatically worse.
Should I start investing in personal stocks too? How do I know this is right for me?
And: It depends on whether you want to. You don’t have to if you don’t want to.
I think of it a lot like this: I could bake my own bread, change the oil in my car, and make my own custom closet shelves. But should I? Whenever I’m tempted to DIY, I ask myself:
- Do I really want to do this? Will I enjoy it? Will it reduce my time to do other things that I enjoy more?
- How much would it cost me if I made it wrong, or low quality? Do I have to pay for equipment that professionals have?
- If I want to learn it, it’s great. I have to be intentional about learning, which means setting up a high-fidelity feedback loop about success and failure. Am I ready to recognize and learn from failure?
- Am I ready and willing to fire myself if I’m not feeling well?
It’s good to have hobbies, but with most hobbies we don’t believe we can get rich quick with them – we do them because we enjoy them. Make sure you enjoy yourself in the process.
How can services like Betterment appreciate an active trading strategy?
And: It is important to remember that you do not have to choose between being a long-term investor or an active trader. Long-term investing can be a great compliment to a trading strategy, especially if you want to meet your financial goals such as retirement, savings for home, or savings for college. Helps you set your goals, make recommendations on how much you should save, and build your portfolio recommendations based on when you need the money to help you invest in the things you care about.
For those who want to actively trade, you can set up a “get rich” portfolio and a “stay rich” portfolio. For example, you can open a risky “get rich” portfolio at a broker that allows you to trade day-to-day stocks and cryptocurrencies, then set up a long-term “stay rich” portfolio with Betterment. That way, you can trade crime-free day without compromising your financial goals.
To get started, you can allocate about 10% to 20% of your assets to your “get rich” portfolio, and the rest to the “stay rich” portfolio.
If or when your “get rich” allocation becomes% 0% of your total assets, balance it between 10% and 20% again.
If you are lucky, you can still be rich and stay rich.
If you haven’t, the best situation is that your long-term investments and savings are still far away for your future use and you don’t have to start saving again.