Imagine trying to explain what happened in the Gamestop/Reddit scenario to someone 30 years ago.
"Yeah so a group of people of the internet all got together and short squeezed Wall Street hedge funds and the whole thing was organized by a guy that goes by DeepF******Value and he confirmed that he's not a cat on a live broadcast."
I don't know about you, but the "new finance world" is kind of intriguing. I like it.
Disclaimer: I'm not saying you should invest in meme stocks or anything similar
But what I am saying is that the finance world is different than it used to be, in many ways:
And isn't this what we wanted?
An abundance of education & accessible investing?
The technology & education exists for people to get in the market with the knowledge you need to succeed, but there's a gap.
A gap between - unprecedented - opportunities, and necessary education.
You see, our parents didn't have access to the education and investments that we do. If they wanted to invest, they had to jump through hoops and dare I say it - call someone - to be able to buy stocks. And if they wanted to learn about investments I'm assuming they either had to go pick up a book from the library, or maybe watch a bland talk show similar to Mad Money.
Now, I wish I had the answers on how to bridge the gap, but I'm just a guy - if the solution was easy and only required one brain to solve, I don't think it would still be a problem.
But what I do know is that how we interact and behave when it comes to our relationship with investing and the stock market has to be different than prior generations.
How can we do that?
Let's break it down.
We're not limited to getting our information from 3 different news channels like our parents were.
Now, this is both amazing and a really big issue.
With the rise of FinTok (financial advice on TikTok) and other social media platforms, there's a lot of misleading and borderline harmful financial advice & information being shared and consumed. However, for every FinTok account, there are a lot of people who are trying to educate our personal finance in a way that resonates with our generation (like me 🤓).
But even with the constant production of good, trusted information, you should still always fact-check things you read or see.
Within the financial world there's a lot of nuance, meaning that a general, blanket statement piece of advice might not be 100% accurate when applied to your situation.
A basic example of this is if you heard someone say "you can get higher returns if you invest in individual stocks". On the surface level, that might be true. But the message that fails to get relayed is that you take on greater risk by investing in individual stocks and based on your situation, you may not be willing to take on that much risk.
My point is, don't take something you hear and immediately take action on it. Think through your own situation, do a little research, and then the biggest tip I have: understand the motives behind the person giving out that information.
For example, a real estate agent is probably going to sell you on the fact that buying a house is a far better decision than renting (because their motive is getting you to buy because earn money after selling you a home). Again, this might not be true for your situation.
As you may know, Elon Musk can fire off one tweet and send an asset (bitcoin) with a $500 billion+ market cap spiraling down 15%.
But if you didn't know Elon had tweeted and you saw Bitcoin down by 15%, you might panic sell because it looks like it's crashing when in reality, people were just reacting to what Elon tweeted. Now, Elon's tweets could have validity and the problems he points out could be real problems, but in this example, the initial swings in price tend to be heavily influenced by his tweet(s).
So before reacting to dips or increases in the market, make sure you understand the "why".
Also, people say it's dangerous that people like Elon can influence markets with tweets and I think I agree, but at the same time, if Warren Buffet made a statement about Coca-Cola and said it was harmful to the environment and that he's selling his stock, I have a feeling the price might go down.
And again, you should do some research on the validity and actual concerns around something before selling, just as you should before buying. Maybe in this figurative situation about Coca-Cola, it is harmful to the environment. Or maybe there was a false report or the problem wasn't as big as it initially seemed in the news.
All of that to say - if your investments drop, make sure you understand the reason before making an impulse decision.
I'll add to that: if your investments drop and you have a diverse portfolio, you're investing for the long term, and you're 25+ years away from age 59 1/2, you shouldn't be too concerned about drops in the market. You have a lot of time left to go and more than likely, you'll experience many drops over the course of your investing career.
One of the most frustrating things that has come out of the 2020 bull market and meme stock mania is the rise of unrealistic expectations when it comes to market returns.
Historically, the stock market has provided returns of around 10% annually.
Tell someone who just started investing last year that you earned 10% and they'll make fun of you like you're losing money. It's insane.
Yes, it's possible to earn 100%+ returns by investing in individual stocks and being early on trends like Gamestop or Dogecoin. But chances are, it's not sustainable for more than a couple of attempts and it's likely that you won't be one of the early investors and you'll miss out on the initial, impactful returns.
Investing in individual stocks is risky and while you may be able to get high returns for a year or two if you're lucky, it's borderline impossible to do over several decades, which is how long most people should be invested to experience the effects of compound interest and long term growth.
In fact, legendary investor Warren Buffett challenged the hedge fund industry to a bet.
Buffett believed he could beat the hedge funds (who invest in individual stocks and other investments) by just investing in a broad-market index fund (which would be like buying a little bit of every stock, reducing your risk and increasing diversification).
Within the year after the challenge started, Buffett's index fund had lost 37%.. However, Buffett's investment then beat the hedge fund's returns for the following 4 years and of course by the end of the challenge, the results weren't even close.
According to Investopedia, the co-founder of the challenging hedge fund conceded before the challenge was even over, stating "for all intents and purposes, the game is over. I lost."
Hedge funds have some of the most educated, dedicated, and well-informed investors in the world analyzing charts and price movements all day trying to beat the market, and even they fell wildly short of the returns that a simple, boring index fund provided.
When investing in the stock market for the long term - set realistic expectations, know your goals and the returns you need to reach those goals, invest boring-ly, and don't be greedy.
Mr. Market likes to play nice, but he also loves exposing people who don't respect the risks that come with trying to beat him.
I'll be the first to say that I love investing in fun things.
For example, I have a little bit of money invested in a '96 Japanese Charizard card from the online platform, Rally Road. And I've put small amounts of money towards bitcoin, ether, cardano and the reason I did this is because I had the other areas of my financial life under control. I don't have any debt, I've established my emergency fund, and my business & personal expenses were taken care of.
Now, I'm not saying that everyone should invest in "fun" things but if it's something you want to do, go for it.
But make sure the important things within your financial life are taken care of first.
The world we live in has changed drastically over the past year, and even more so when compared to the world that our parents grew up in. That means the way we approach things like investing in the stock market has to be different than how it's been done historically.
General rules of thumb still apply, but we have to be more educated and careful when it comes to the decisions we make and the information we listen to.
Make sure you get your information from trusted sources and do your own fact-checking and research, understand the 'why' behind events that are happening in the market, set realistic expectations and with that, you'll be well on your way to successfully navigating the modern markets.