I was recently quoted in an article for Long Island Newsday, and mentioned that there are big differences between investing and trading. Both want to profit from appreciation in the stock market, but the time horizons are very different. Investing is long-term – it considers your goals, risk tolerance, liquidity needs, and longevity. You look to diversify your portfolio appropriately for your circumstances and put money across various asset classes. Ideally, you rebalance as markets move and stick to your long-term plan in the face of market volatility. For many investors, trading, on the other hand, can be focused on “getting rich quickly” by watching the market and pick out a stock or a number of stocks that you think you can quickly turn a profit from.
What we recently saw with GameStop caused a lot of damage to individuals who didn’t understand the fundamentals of the market. Many looked at it as a “get rich quick” scheme. When they read the blog posts on the WallStreetBets page on Reddit, believed the hype about taking down Wall Street hedge funds and saw the stock rising rapidly, they jumped in to get in on the action. Unfortunately, they didn’t do any homework. They didn’t understand the forces that were propelling the stock. They didn’t see that markets can reverse very quickly – especially when speculation is involved.
We have heard many stories of individuals who used their life’s savings or those who took out loans to throw into this “you only live once” trade. They bought in thinking that the stock was only going to go up. They didn’t consider the downside, didn’t consider the consequences, and invested with emotion rather than knowledge. They believed it would go to $1,000. They bought in at anywhere from $50 to $350 and were unprepared when the stock sank by 80%.
While there are regulations in place at brokerage firms to qualify for trading stock options (at least some prior experience trading stocks is required), this is not the case for buying regular shares of stock. Anyone over the age of 18 (21 in certain states) with a social security number can open an online trading account with many custodians or brokerage apps like Robinhood and start buying stocks.
We work with our clients to develop a sound financial plan. We look at their budget, their goals, their wants and needs. We see what savings they already have, how their assets are allocated, and how to help them reach their long-term goals. We do not speculate.
We understand that some clients enjoy the thrill of trading. For those clients I always ask the question “If you were going to a casino, how much would you be willing to lose”? The reason I ask that is because trading is speculative just like a casino. Someone wins and someone loses. When clients give me the number that they’re willing to lose, we segregate that into their “play money”. That is the money they can use to speculate. I do not consider that money in their overall financial plan and if one day they make money on their trading, they can go out and splurge on something. I am comfortable knowing that their nest egg is safe and that they are allocated correctly for their personal circumstances.
If you would like to explore creating a financial plan that takes into consideration long-term goals, please reach out to any of us at Wealthspire Advisors.