February 23, 2024

The Downsides of 3 Popular Investment Trends

One popular saying about economics and investing is that “a rising tide lifts all boats.” When the economy grows, companies become more profitable, and people get more prosperous. Ideally, everyone is supposed to end up better off. But in the world of investing, not all boats keep rising. Sometimes, stock prices go down as well as up. Hot new industries or asset categories can go from boom to bust. Can’t-miss investments can’t always last.

The past few years since the start of the pandemic have seen wild swings in the stock market: drawdowns of around 30% in February–March 2020, followed by a meteoric rise through the rest of 2020 and 2021. Then, in 2022, stocks and bonds went down. The volatility of the stock market can be unnerving for many investors who are trying to save for retirement and build their wealth.

Along with the volatility of the stock market, there have been a few popular investment trends in recent years that have gotten more investors interested in buying stocks and other financial assets. While in many ways, it’s good news that more Americans own stocks, there are also some big downsides to these investment trends.

Let’s look at a few popular investment trends — and why they could be risky for your personal finances.

1. Meme stocks

For most of the past 20 years, GameStop Corporation would not be any expert’s pick for a hot stock. The video game retailer had fallen on hard times as people migrated to online gaming platforms instead of buying physical video games. It seemed like GameStop would go the way of Blockbuster Video — an outdated relic of the pre-digital age.

But then, in the winter of 2021, a group of amateur stock investors on a Reddit community called r/WallStreetBets decided to send GameStop stock “to the moon.” Whether it was a nihilistic social media prank or a principled stand to do a short-squeeze against billionaire hedge fund investors, it worked. GameStop became the hot “meme stock” of 2021.

Redditors and other investors somehow sent GameStop stock skyrocketing, from around $5 per share in December 2020 to a new all-time high of $81.25 on Jan. 29, 2021. Some big Wall Street hedge funds that had been shorting GameStop stock lost billions of dollars; some individual investors from Reddit got rich.

The meme stock craze became one of the biggest financial news stories of 2021. But along with the hilarity and the fun, it’s important to remember that meme stocks can go down as well as up. If you’re taking investment advice from a community of foul-mouthed trash talkers egging each other on with risky stock picks on social media, you might end up losing money even faster than you made it.

2. Crypto

I’m kind of afraid to even type these words because I don’t want a bunch of laser-eyed crypto enthusiasts to fill my inbox with hate mail, but: Cryptocurrency is really risky! Not every new altcoin or digital token or digital asset turns out to have real long-term value. Just because something is scarce doesn’t mean it’s valuable. Yes, some people have made lots of money off of crypto, but other people have lost lots of money. And there’s no guarantee that crypto is the best long-term investment for your financial goals.

I’m not trying to harsh anyone’s vibe here. If you’re a crypto investor, I wish you the best of luck. But crypto can be really risky, and it seems like lots of prominent people in the crypto world, like former FTX CEO Sam Bankman-Fried and Binance founder Changpeng (“CZ”) Zhao, keep getting convicted of federal crimes and sent to prison.

Maybe I’m just an old-fashioned fuddy-duddy, but I try to follow Warren Buffett’s advice to invest in what you understand. And I don’t understand crypto. It doesn’t pay interest like bank accounts do. It doesn’t pay dividends or have fundamental corporate earnings or bond cash flows backing it. With crypto, you’re buying a speculative digital asset because you think it will be worth more in the future than it is today. It’s like digital gold — but I don’t invest in gold, either.

If crypto is a bet that you want to make, then good luck. But I worry that a lot of people are risking money on crypto (real American dollars, not Dogecoin money) that they can’t afford to lose, and that could get a better long-term return on investment from the S&P 500.

3. Day trading

Whenever the stock market is on the upswing, there’s a big increase in day trading. The pandemic caused a huge surge of people signing up for retail brokerage accounts and using their stimulus cash to invest in stocks. On the one hand, this can be a good thing! If more people are making money from the stock market and building wealth for their financial goals, that’s great news.

But too often, people turn investing into gambling. If you think you can time the market, if you think you know better than millions of other analysts, researchers, and sophisticated investors with trillions of dollars to invest, then you’re likely to lose. Very few professional investors can beat the market for long. In fact, most day traders lose money.

Bottom line: Speculative assets like meme stocks and crypto can deliver huge short-term returns, but they can pose big risks. Being a stock picker or day trader can also cause you to lose more money than you gain. Instead of trying to beat the market, most investors are likely better off in the long run by buying S&P 500 index funds.

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