Investors and non-investors alike saw just how sensitive the stock market can be after GameStop’s extraordinary journey in January. They also saw how that chaos could affect their own money.
Retirement Tip of the Week: Don’t jump into a stock market feeding frenzy with your retirement savings.
Investing in the stock market always has risks. Some people choose a “buy and hold” strategy, which is inherently passive, while others prefer active trading. Investing over the long term will typically get you better returns than a bank’s savings account, so if you abstain from investing entirely you probably won’t reach your retirement savings goals.
That doesn’t mean you should try to time the market or bet on the “right” stock, as evidenced in the GameStop GME, -37.99% turmoil.
“Stock picking is never a long-term strategy,” said Marianela Collado, chief executive officer and a senior financial adviser at Tobias Financial Advisors. “Your retirement savings need to be the steady lean-mean growing machine, cautiously invested with diversification and free of speculative investments.”
Some investors who jumped on GameStop’s stock during a Reddit-fueled rally made good money. Investors posted on social media that they were able to pay down student loans or donate their profits to charity. A fifth-grader earned $3,200 from the stock’s uptick thanks to the 10 shares of GameStop his mom bought him for $6 each in 2019.
The caveat — and it’s a big one: Not everyone reaps those kinds of benefits. Novice investors may snot have an opportunity to get in on the action, or they could be too late to a favorable price (especially considering how much the cost of a share may fluctuate). It’s too soon to tell how long GameStop’s stock will be on this roller-coaster ride, but people who jumped in when the stock was well into the upturn could potentially lose out on hundreds, if not thousands, of dollars.
“It can be fun and the wins are encouraging,” said Scott McLeod, president of Brown Financial Advisory. “But countless studies have shown that it is nearly impossible to beat the market over time. So to put more of your financial future at risk on the chance that you hit one ‘lucky number’ is a near certain probability that you will be without a chair when the music finally stops.”
GameStop’s journey has been volatile the past month. Hedge-fund managers wanted to short the retailer’s stock, which means they would borrow shares of the stock and then make a profit off the difference when it dropped (as they expected it to do). But then a group of investors on Reddit’s thread WallStreetBets rallied for the retailer’s stock. The mission became a movement, getting everyday citizens to play the same stock market game as hedge-fund managers, who typically take on high risk investments. With such force, GameStop’s price skyrocketed.
These aren’t the types of investments that work best for retirement savings, financial advisers said. And this type of participation in the stock market is speculating, which is akin to gambling. Investors don’t need to avoid this type of investing entirely, but should only do so with a “play account,” using money they are comfortable losing, Collado said. Many financial advisers said investors inclined to stock pick should avoid holding more than 5% of their portfolio in individual stocks.
“Retirement savers need to stick to fundamentals when it comes to their savings — meaning, maintain that long-term view, stay diversified and ignore the news of the day,” said Juan Ros, a financial adviser at Forum Financial Management. “When it comes to speculating, you have to assume that you can lose 100% of those dollars. Keep your long-term investment portfolio separate from your short-term speculating dollars, and never speculate with money you know you are going to need in the future”