I recently took my first plane trip since the start of the pandemic. In addition to the strangeness of being around so many people again, I was struck by the conversations. My Uber driver described his latest crypto purchase, and in the hotel lobby, I overheard guests discussing their latest meme stock trades.
While I love to hear people’s interest in markets — and why not, the market provides endless excitement — I worry that people confuse trading in ultra-risky assets such as cryptocurrencies and meme stocks with investing. There’s a distinction that has important implications for your portfolio.
Investing is about growing and/or protecting your wealth to serve a particular goal, be it a vacation, safe retirement or legacy. Because investing involves risk, we need to be aware of what those risks are and take a long-term view. We also need to be cognizant of how various individual investments work together to bring us closer to those goals.
Trading, on the other hand, is a short-term bet on a stock or other security: “Company A is going to launch a new product and I think it’s going to be really popular.” It can be fun to trade, like playing the roulette table in Las Vegas. But just like Vegas can be hard on your wallet, trading can be risky for your portfolio.
In times like this, the temptation to trade, rather than invest, can be quite great. Headlines are awash with stories of overnight wealth created by such trades, and now-busy restaurants are full of patrons describing their latest crypto purchases. These are exactly the times when trading can be more perilous than ever. Individuals might take more risk than they realize and losses can pile up rapidly. Suddenly, a portfolio that was so carefully crafted to match a client’s financial goals has gone awry.
This is where a financial professional’s counsel is so important — to keep clients on track and focused on investing, not trading. Last March, when the stock market experienced one of its most rapid and steep declines in history, many talented financial professionals spent their time advising clients to focus on the long term, look past the challenges of the then-burgeoning pandemic and hold fast to their goals. In short, they advised, remain committed to your investment plan.
Providing that advice and heeding it took tremendous courage. But those who did saw their portfolios benefit handsomely as the stock market went on to rally in dramatic fashion, leaving the portfolios of the brave very healthy.
Now, it feels, the need is just as great to remind clients to focus on long-term goals. In short, don’t buy ultra-risky assets with abandon. There can be a place for trading or buying those types of assets that swing wildly from day to day. Just keep the sizing appropriate to the overall portfolio.
I have some friends who love to gamble in Las Vegas, but before leaving they will set a budget for how much they’re willing to risk. That way, they can enjoy themselves without blowing the whole bank account.
To be clear, this is not a call as to whether these types of assets will continue to appreciate. The most important consideration is the risk relative to goals.
Another reason to steer away from trading and embrace investing is that it’s backed by empirical evidence. Study after study has shown that investors who trade more often tend to have lower returns while those who trade less and focus on the long term have portfolios that benefit.
Be brave and counsel your clients: do your portfolio and your future a favor — don’t trade, invest.
