Recently, I was quoted in a piece for Long Island Newsday and stated that investing and trading are very different. The two are both looking to benefit from stock appreciation, but their time frames differ. Investment is a long-term process that takes into account your financial goals, tolerance for risk, liquidity requirements, and overall longevity. Diversifying your portfolio according to your situation and investing in different asset classes is important. In the ideal case, rebalance your portfolio as market conditions change and stay true to your plan despite volatility. Trading, however, is often based on making money quickly. This can involve watching the markets and picking out stocks you believe you can turn a quick profit.
We saw recently with GameStop that it caused damage to those who did not understand the basics of the market. It was seen as a way to “get rich fast” by many. They jumped into the game when they saw that the Wall Street hedge fund was being taken down and they believed in the hype. They didn’t research the stock. The forces driving the stock were not understood. The market can turn around very fast, especially when speculators are involved.
Many people have told us stories about how they used all their savings, or even took loans out to invest in this trade. The stock price was expected to rise, so they bought it. The investors didn’t think about the negatives, the potential consequences and they invested on emotion instead of knowledge. They thought it would reach $1,000. The stock dropped by 80 percent when they bought at $50, $350 or even more.
There are rules in brokerage firms that require prior trading experience to be able to trade stock options. However, this does not apply when buying shares. With a Social Security number, anyone over 18 years old (21 in some states) can start trading stocks online with many brokerages and apps.
Our clients and we work together to create a solid financial plan. We examine their financial situation, goals, and wants. We look at their savings, their asset allocation, and their goals to see how we can help. We do not speculate.
Some clients love the excitement of trading. To those clients, I ask them “If you went to a gambling establishment, what would you risk?” This is why I ask, because trading is just as speculative as a casino. Some people win and some lose. We separate the “play money” that clients are willing to risk when they tell me how much. This is money that they can speculate with. This money is not part of their financial plan. If they ever make money from their trading they will be able to spend it. It makes me feel good to know that the nest egg of my clients is secure and allocated according to their individual circumstances.
Please contact us at Wealthspire Advisors if you’d like to discuss creating a plan for your financial future that includes long-term objectives.
