By Brian McKinney, CFP®
Published on Paladin Registry on July 9, 2021
As our clients are well-aware, we take a long-term view with our investment philosophy, focusing on crafting diversified portfolios and believing in the power of compounding returns to build and preserve wealth... As prudent and wise as this approach may be, this kind of investing can be seen as boring to some investors. This feeling can be exasperated during periods when technology, trading apps, crypto, and other speculative investment options are garnering so much excitement. Investors can’t help but wonder, am I missing out?
“Fun” is Attractive
In March of this year, the wildly popular stock-trading app Robinhood announced its intentions to go public. Of course, this is no surprise given its surge of user growth in 2020. But, how did they do it? How did they capitalize on these volatile times and come out on top? A simple three-letter word: FUN.
Robinhood sold the narrative that investing is fun. They have a user-friendly interface that puts DIY “investors” in the driver’s seat and borderline outlandish marketing to push their services on those with investing FOMO or fear of missing out. In its attempt to appeal to the human desire for excitement, the company has even gone as far in their marketing to liken investing to the thrill of buying a motorcycle—something very liberating, exhilarating, daring, and bold. Riding a motorcycle down the coast of California or through the Carolina mountains sounds far more exciting than “buying and holding.” Where’s the excitement in that?
What isn’t fun or exciting, though, is losing your nest egg to your own speculative investing choices. The current market climate has served Robinhood’s mission quite well. Everyone thinks investing is fun when the market is riding all-time highs. It’s a different story, though, when things turn south. Investing isn’t nearly as much fun when you see your nest egg dwindling down month after month. Suddenly, the vanilla buy-and-hold approach isn’t looking so bad after all.
How to Make Fun Investments Without Losing It All
Investing doesn’t have to be one or the other. For the right investor, it’s ok to branch out and have some fun with your portfolio. You’ll just want to be sure you don’t overextend your speculative or alternative reach. Not only could this relieve any FOMO you may be feeling, but could be a great behavioral release that will help you stay on track with the rest of your portfolio.
Investing vs. Speculating
The main difference between investing and speculating is in the risk profile. Investing involves careful analysis of fundamentals to determine where might be the best place to deploy funds in order to earn the highest possible return given the level of risk you are taking.
Speculating, on the other hand, is far riskier. Sure, many speculative investments have a high potential return rate, but also have a high potential for significant fluctuations in value in a short period of time. Just take the recent dip in Bitcoin1 as a prime example. High risk may yield a high reward but could be swept away in a flash.
Now that we’ve talked about speculation in general, here’s some educational information about speculative investments that have been coming up in the news.
“What do you think about crypto?” is a question we get quite often. Because crypto isn’t a productive asset that pays dividends or income, “investing” in cryptocurrency is essentially speculatively exchanging your US dollars into digital currency. Your “investment” is based on the bet that someone else in the future will pay you more for your digital currency than you paid when you bought it.
This is of course a very interesting and neat technology that trades 24 hours a day, 7 days a week, 365 days a year, and is not created or manipulated by the government. Its value can always be swayed by a celebrity tweet (ahem- Elon Musk)! But, there is no industrial use, no internal product, it has a limited track record, and is very speculative.
2. Meme Stocks
You’ve heard of memes and you know what stocks are. But, meme stocks? It’s hard to define with certainty what a meme stock actually is because this sector (if one can even call it a sector) is relatively new.
Meme stocks are equities that see an unprecedented surge in interest from individual investors as a result of inflated attention on social media. GameStop may forever be credited as the first meme stock to skyrocket in value after retail traders in Reddit2 communities urged the public to swipe up shares of this near-bankrupt company in order to push back against Wall Street hedge funds. Since then, AMC theaters and Clover Health (CLOV)3 are two of the other major meme stocks that have taken the main stage. To add to the histrionics and keep interest high, AMC theatres4 has even announced they’ll be giving shareholders certain perks such as a free large popcorn when they attend their first AMC theatre this summer.
According to Nasdaq5, meme "stocks are triggered by small traders who cause a short squeeze on the stock. A short squeeze6 is a term used by market participants to refer to a phenomenon where short-sellers who have placed their bets on a stock's fall, rush to hedge their positions or buy the stock in the event of an adverse price movement, in order to cover their losses. This leads to a sharp rise in demand for shares and a huge rally in share prices."
As such, meme investing can be very risky. The initial surge in price is due to something as volatile and ever-changing as interest online—which we all know can change on a dime. With these stocks, there is a high probability that the stock price will decline in value once the media frenzy settles and online communities turn their eye to the next in line.
While there is potential to earn a large profit in a short amount of time, the risk of loss is just as high. Easy come easy go. So, if you do jump on this train and lose out, at least you haven’t risked your core investments (and can at least cash in on some free popcorn).
Choose Your Fun
Prudent investing isn’t supposed to be exciting. But all investing doesn’t have to be boring, either. Consult with your financial advisor today to learn how you could allocate a small percentage of your portfolio to speculative or alternative investments. Turns out it’s ok to scratch that itch to get in on what’s new and exciting without endangering your future financial stability in doing so.
If you’re curious about or are seriously considering investing in speculative assets, the bottom line is that you must do your own due diligence, thoroughly research and understand the benefits and significant risks, and be fully prepared to lose your entire investment, before making any decisions.
If you have questions about these or other speculative investments or are in need of a trusted financial ally to help you make other important financial decisions, feel free to contact the advisors at William Asset Management to schedule a call today.
This article is intended strictly for educational purposes only and is not a recommendation for or against any of the speculative assets/ strategies listed.