I’ve learned a few things in more than two decades of writing about personal finance and investment culture. Most takeaways are fairly simple, the sorts of things that can be put on an index card.
Here’s one rule that never fails: If you hear someone saying “this time is different,” pause. Take a deep breath. And then remember: This time is never different.
Unfortunately, many people don’t do that. Which goes a long way toward explaining what’s been happening in the markets, especially in tech stocks and cryptocurrencies.
The Standard & Poor’s 500 stock index fell Wednesday, after Federal Reserve Chair Jerome H. Powell reiterated plans to raise interest rates to combat resurgent inflation. At the end of a very topsy-turvy week, the S&P is down slightly more than 7 percent since the beginning of the year. The tech-heavy Nasdaq is in full correction territory.
But others have fared worse — in some cases much, much worse. Now that many people are #DoneWithCovid, pandemic favorite Peloton has fallen more than 80 percent from its high point since late 2020. Stonks — aka meme stocks — are also collapsing.
GameStop and AMC have fallen by more than 50 percent since late November. Cryptos are in bad shape, too, with the overall market for digital currencies having shed $1.3 trillion — again, almost half their value — in the same period of time.
Here’s the good news: If, like half of all individual investors, you simply placed money in an index fund that replicates the broader stock market, you shouldn’t feel shaky. That’s because the S&P 500, for all the recent declines, was, at the close of the market Friday, still as high as it was in mid-October.
If you felt satisfied with your portfolio then — and chances are pretty good you did — you should be happy now.
But others were led astray, in part by self-appointed TikTok and YouTube investor consiglieres, many of whom were infants when the dotcom bubble blew. Some of them fell hard for gamified stock market apps such as Robinhood, which lured them in with free trades and then quickly encouraged its often less than financially literate traders to invest in complicated options.
These newbie traders who congregated on Reddit boards let themselves be convinced that they could harness new technology to trade the stocks of fading retailers such as GameStop and take part in a heroic investor revolution, striking a blow against the 1 percent.
Au contraire. They were minnows who got sold on the idea they were sharks. As the Wall Street Journal’s Spencer Jakab recounts in the excellent new book “The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors,” many meme stock traders lost money.
The same was true for minnows who invested in special-purpose acquisition companies, known as SPACs. Those are companiesthat go public to raise money in order to acquire ayet-to-be-determinedbusiness.This permits the latter business to go public without the broad scrutiny an IPO normally gets.
People were sold on the idea that SPACs would let them invest like multimillionaires. Instead, they are discovering that if a company doesn’t want to fully expose its financials — like it would if it did an initial public offering — that’s often a warning sign of a less-than-promising business model, not a diamond in the financial rough.
And then there are cryptocurrencies, the much-heralded digital money. Does it have its uses? Absolutely.
But beyond allowing celebrities (Kim Kardashian, Matt Damon) to make a quick paycheck promoting the stuff, it’s difficult to name a legitimate one that most of us here in the United States can’t do another way, easier and quicker.
But should Dogecoin — a cryptocurrency started as a joke — really have increased more than 12,000 percent in value? Probably not, since it has subsequently given back more than three-quarters of that gain.
Bitcoin, down a mere 45 percent, seems like a savvy buy in comparison.
Here’s the core truth in all this: The combination of pandemic-era low interest rates and a flood of government stimulus did more than rescue the Americans left jobless, and even homeless, by shutdowns.
A lot of that money flowed to Wall Street — some in the form of money meant to prop up small businesses that instead went to much larger firms, some via stimulus checks that investors put in the market.
Now that money is going away.
As a result, a lot of people are learning an expensive lesson. They convinced themselves that their ability to pick winning stocks or speculate successfully in crypto was due to their skills and smarts, not the temporary circumstance of speculating in markets where almost everything was going up at a rapid clip.
Next time, most of those investors should check out an index fund instead. As wise heads have known for a long time, they’ll almost certainly do better in the long run.
Read full story on The Washington Post