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QUICK FINANCIAL scores can be thrilling. The idea of plopping down a few bucks to hit it big with a lottery ticket or the roulette wheel is alluring to many. Even folks who know the odds are stacked in favor of the house engage in these gambles.
That brings me to a recent M1 Finance survey of more than 2,000 investors. A particularly sobering stat involved alternative assets: 73% of those who described their situation as “struggling to survive financially” planned to invest in some form of alternative asset, such as cryptocurrencies, in the next 12 months.
I’m not here to cast shame on gamblers. But it’s sad when people feel the need to go for broke in the financial markets. What makes such gambling especially disheartening is that a disciplined investment approach can build substantial wealth over time. For example, $40 invested in a low-cost stock index fund each month for 40 years would grow to more than $160,000, assuming a 9% annual return.
Also striking about the survey’s results: Over half of Gen Z and millennials—those born since the early 1980s—have taken an investment action because of social media. That includes me. I put money to work in some fringe investments last year, partly because of what I saw on social media. I’m sure we all know someone who dabbled in crypto or meme stocks in 2021 simply because others were doing so.
Daniel Crosby, the author of The Behavioral Investor, described some of last year’s herd mentality as community behavior. The pandemic forced many of us into isolation, leading some to seek social connectedness via a group of meme stock traders.
A little play money is fine. Dabbling in speculative trading with a small piece of your portfolio probably won’t hurt you much. Just be sure to keep your long-term objectives in mind—and strive to invest sensibly with the money earmarked for those goals.
It is interesting, and tragic, that those who can least afford loss often place the biggest bets against the longest odds. The bleeding edge of any technology or development, whether its electric vehicles, crypto currencies or back in the day personal computers or cell phones has huge opportunity but there are many more bad companies to bet on than the handful that will be megacorps ten years later. And it is nearly impossible to tell which is which. Good advice!
Well put, Steve!
Nice article, Mike. It is so tempting to want to jump on the next trend, especially when you hear people talking about the riches to be made. I try to steer clear of things I don’t understand. I’m pretty sure that by the time I hear of the next thing, it’s already too late.
Thanks, Rick! It’s amazing that these mini-bubbles have been deflating for the better part of the last year. Meme stocks peaked a year ago next week and the crypto market peak speculation likely happened last May. US stocks (ex-large-caps) are down 15% yoy!