More people are investing today than ever before. The COVID-19 pandemic has given people a little extra cash in the form of stimulus checks, as well as more time to explore new ways to invest their money. It certainly helped the market make a stunning comeback after its brief crash in March 2020 – with the S&P 500 ultimately gaining over 18% for the year – and the fact is that around 15% of current retail investors have started to invest in 2020.
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The downside, perhaps, is that the growing interest in investing has been largely fueled by an interest in speculative and volatile assets such as meme stocks, cryptocurrencies and NFTs. This wouldn’t necessarily be a problem for the seasoned investor, but with so many young, inexperienced participants entering the market, investing feels a lot more like gambling lately. So, is it good or bad, and what does it mean in the long run? GOBankingRates asked a few experts what they think.
The democratization of investment
JMP Securities estimated that around 10 million new customers joined the brokerage industry in 2020, of which more than 6 million turned to the investment app Robinhood. With features like fractional shares, access to IPOs, and commission-free trading, users can buy just about anything without the help or advice of a financial professional.
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“In the digital age, investment options have expanded dramatically,” said Micah Carnahan, crypto and fintech specialist at Finder.com. “In today’s app-based environment, the average person is no longer dependent on large investment firms to manage their portfolios.” This, he said, is good for people who seek sovereignty over their personal financial decisions.
But with this freedom comes a host of risks.
‘A disaster waiting to happen’
That’s how Scott Alan Turner, CFP and consumer advocate, describes the current situation.
“Anyone who hasn’t lost half (or more) of their investment doesn’t know what it takes to be a long-term investor,” he said. Over the past 10 years or so, Turner said most people have come to believe that they are good investors. Not because they are, but because just about everything has gone up in value. “People who have been through a crash or two and who understand market cycles have a better handle on risk and returns.”
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On the other hand, he said that if you are going to take major risks with your money, it is better to do it when you are younger or just starting out. “You will have time to recover from big mistakes,” he explained.
Ultimately, this new era of investing means that more people have wider access to different types of investing at minimal cost. As a result, the average person has the freedom to develop their own wealth-building strategy, without lining the pockets of a financial advisor or broker.
That said, there is also a much higher chance of losing. “A lot of people like to invest in Tesla just because they own one or see one on the road. Or maybe because Elon is the richest person in the world and sends funny tweets,” Turner said. “If you asked them if they read Tesla’s corporate balance sheet, they would probably say, ‘What is a balance sheet?'”
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In other words, it’s important to learn the fundamentals of investing before committing your hard-earned money and to avoid buying an asset until you really understand it. “For investors looking to diversify into digital assets, it’s important they weigh the risks of this nascent investment class,” Carnahan said. “The volatility of cryptocurrencies, for example, along with the growing threat of exchange hacks, are important considerations for newcomers to the space.”
Ultimately, all investors need to do their due diligence and make sure they are completely comfortable with the risks. Turner added that if you can’t explain an investment to a 5th grader, that’s a sign you’re not actually investing, but speculating. And it really is a recipe for disaster.
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