The Stock Market: The most expensive amusement park
Managing expectations is very important when it comes to investing. It’s sometimes hard to distinguish skill from luck when hearing stories about home run stocks. Michael Batnick, Director of Research at Ritholtz Wealth Management, said it best; “Diversification is slow and boring, concentration is fun and exciting. But if fun and exciting is what you seek, the stock market is a very expensive place to find it.”
Speculation can be fun when you’re on the right side of a trade. We’ve seen this for many individuals the few past months. However, when building a long-term strategy, it’s important to steer clear of the temptation to speculate. Don’t get me wrong, I truly believe that every investor should indulge in some stock picking in their own discount brokerage account if they enjoy it. However, that should be a very small percentage of their overall portfolio. That way, if their positions get cut in half or go to zero, they will barely feel it.
Speculation has been around forever; the only difference today is that social media amplifies its existence. Individuals post their “homerun” trades that quadrupled their initial investment within days. This creates the fear and social anxiety of missing out for many, or as most people commonly refer to it as, “FOMO.” Inevitably this leads to irrational investor behavior, chasing the same types of trades and putting more of their savings at risk to “get rich quick.”
Historically, if you planned to buy and sell the S&P 500 broad index within the same trading day, there is a 46% chance that you would have lost money, virtually the same odds as flipping a coin (See chart below). However, if you hold onto that same investment over a 10-year period; the chances of having a negative outcome decrease to about 10%. In essence, the longer the holding period for most investments the lower the probability of having negative returns.
If you are responsible with your long-term retirement savings and you’re comfortable losing the other pool of money you’re speculating with, I see no issue. In fact, I think it can be a valuable experience to learn about market mechanics when trading stocks, ETFs or crypto. Just keep in mind that wealth isn’t created overnight for most individuals. It’s years of saving and compounding that usually pay off in long run. In the meantime, avoid the noise and stay disciplined in your investment strategy.
Batnick, Michael. Big Mistakes: the Best Investors and Their Worst Investments. Bloomberg Press, 2018.
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