We seem to have entered a somewhat new era for the stock market early in 2021. You may even call it the “Age of the Amateur.” The question is not whether you agree or disagree with what the retail investors are doing with the GameStop (ticker: GME) stock purchases and others such as AMC Entertainment. Rather, how will this event affect your overall retirement portfolio?
The one thing we keep hearing is whether what they are doing is all legal. In my opinion, as long as retail investors are not illegally trading off insider information and other dirty tactics, then the answer is yes, it is legal. This situation is no different than if a billionaire were to get on the news and talking about a stock they feel is a bad investment, scaring the market, all the while they are “shorting” and making more billions. While the “little guy” is wondering if your money is going to last you the rest of your retired life. For example, the Bear Market Feb-March 2020.
The other part of the story is Robinhood and other retail stock trading apps impacting the market prices when they decided to halt new GME and AMC purchases for retail investors. The legality of this is more in question than those that are purchasing and selling.
However, one must wonder how do the stock trading apps make any money. You should know that it is mostly by investing YOUR money in safer, interest-paying investments, as you look to “get rich quick” on a penny stock that may or may not payoff. It is similar to how a bank makes money on your deposits. Quick note: if I leveraged a client’s money to earn interest from it, especially without disclosing it, I would be writing this article from a small prison cell.
Having an app to do all your trading right at your fingertips seems like a great way to start saving. But once you start taking chances on that money, especially with “longshot” investments, then it becomes nothing different than a horse betting app. You can “box” your investments with options like puts and calls, just like you can with your Exacta and Trifecta bets. If you are taking a little extra cash and having some fun with it to see if you can “win” something on the Robinhood app, then I wish you all the luck – play responsibly!
As an advisor, I chose early in my career not to get mixed up with the “game” aspect of investing. Don’t get me wrong, I want to see my clients succeed with their investments. But only at the risk that they feel comfortable with, and with that tolerance, it has to be with an investment portfolio that I feel comfortable with. This is a team effort, but not a GAME! Chasing stocks like GME and AMC will probably not be something I will ever do with my clients. This allows me, and hopefully, my clients, to sleep better at night. If what is going on worries you, then I invite you to sit with an advisor and determine your risk tolerance so that your retirement portfolio can be better prepared for an era such as this.