Have come to light recently during these extraordinary times. The first is a substantial increase in people day-trading stocks and the second is the surprising lack of activity in 401(k) accounts.
These two things are moving in completely different directions on the behavioral spectrum, one exploding with euphoria and the other about as boring as it comes.
Many studies illustrate just how poorly most day-traders perform, but there is no shortage of interested speculators these days. Stay at home orders, absence of sport betting, zero commissions and slick trading platforms have all contributed to this upswing.
While COVID is hazardous to your health, day-trading is hazardous to your wealth. Robinhood, a zero-commission stock trading app on your phone, embraced by younger investors, has seen millions of new users since February, and some of the most popular stocks bought and sold are real head-scratchers. For example, hot stocks in recent weeks have been Hertz, the bankrupt car rental company, and FANGDD Network Group, a Chinese online real estate company that coincidentally shares the same letters as the wildly successful growth of the “FANG” stocks. Yikes.
This has similarities to the “Dot-Com” craze in the late 90s and early 2000s. Back then the euphoric pulse was quite similar, whereby company fundamentals were ignored for a trendy company name, lots of quick money was made followed by an abrupt crash and enormous loss of wealth.
These last few months the line between investing and entertainment has blurred and is contributing to the disconnect between stock market returns and the gloomy state of the global economy. As newbie traders see amazing returns in their risky day-trading efforts it breeds overconfidence leading to a false sense of security. Eventually there is always a fool left holding the stock nobody else is willing to buy.
While sidelined sports gamblers are trying their hand at a day-trading gold rush, does this mean the average investor is doing the same? Thankfully, and surprisingly, no. In fact, a recent Wall Street Journal article stated that nearly 95% of those in 401(k)’s run by Vanguard did absolutely nothing during the first four months of 2020, instead opting to stay the course during choppy waters.
This is different than scary markets of the past. Maybe it was because of the sudden nature of the stock market pullback, there just wasn’t enough time to let it all soak in before the government stepped in and things started going back up. Or perhaps the typical individual investor has learned that panic selling is not a productive strategy. This pattern won’t last, however; a longer bear market will once again rattle nerves resulting in irreversible damage. It’s just how we are wired.
Finding the right mix of risk (stocks) and stability (bonds) and then sitting quietly in your room has proven to pay off over the long term. Even during recessions, you will be reinvesting dividends and purchasing new shares in your 401(k) at a discount. Acquiring more shares is controllable, the price of each share over the short term is not.
Don’t be hoodwinked with false comforts of market timing strategies and quick profits from day-trading. As the 19th century American humorist Josh Billings once wrote, “It’s not what a man don’t know that makes him a fool, but what he does know that ain’t so.”