Investing vs Speculating
The year is off to a strong start in the stock market. The best performing equity stocks ended February 28th where value stocks. With large cap value stocks finishing up 5.1% year to date and small cap value stocks up 15.2%. We believe there will be another stimulus package passed this year and a "get back to normal" tailwind to drive more economic activity to Main Street America in the second half of 2021.
The biggest market news catching the eye of retail investors to start the year would be large moves and ongoing speculation in Gamestop, AMC and Bitcoin (and others). Followed by a wave of lawsuits and congressional concern over the business practices of Robinhood, (an online trading platform). How these events play could have an impact on FinTech companies and financial regulators. At the time or writing, it appears more settlements and lawsuits are on the horizon, with Robinhood alone, currently facing over 50 lawsuits.
What is the difference between speculating and investing?
"There are two possible ways to take advantage of the recurring wide fluctuations in stock prices, by way of timing or by way of pricing" — Ben Graham
Speculating focuses on trying to time the purchase and sale of stocks. This is statistically extremely difficult. Even the best investors in the world fail to do this consistently. The cost of timing markets for the majority of investors is very expensive, non accretive to wealth creation and unwise. Just read up on the annual Dalbar study and look at fund flows for retail investors.
Investing focuses on understand the value of a stock today and what it should or could be worth given the information on hand. There are several formal methodologies that can be used to value stocks to consider.
Financial Technology Companies Glorify Speculating
As financial planners and investment advisors we see recent market events and new financial trading platforms adding another layer of risk and confusion for investors. Taking advantage of human behavior for profit, and providing a means to regularly reinforce bad financial behavior that may not be accretive to investors needs, goals and best interests. Making it easier for investors to make bigger mistakes, very quickly. Sterling Edge Financial is concerned with the manner in which a large group of consumers are using these platforms. The use is inconsistent with investing and could create experiences that impair or prevent investors from understanding the difference between investing and speculating.
Do we dislike fintech? No, we welcome technological improvements to serve clients in a meaningful, sincere and professional manner. We see lots of room for improvement and further commoditization to enhance financial planning and investing experiences in the future to the benefit of market participants. Our hope is that the additional costs and risks presented and offered by Robinhood (and others) are more clearly communicated to investors.
Nothing in Life is Free
My dad taught me an important lesson as a kid that "nothing in life is free". The older I get get the more true it becomes. Everything has a cost. In the 21st century, anything that is marketed as "Free" typically isn't free in anyform. It typically means you are the product. You or your information are getting monetized. (i.e. Facebook or Google).
Market Risks and Valuations
Heading into Spring 2021 we see parts of the stock market that appear overvalued or otherwise trading at high premiums. Some of these sectors have the potential to grow into their current high valuations. Others appear to be longshots with very little opportunity or chance to sustain their valuations or even stay in business without the accumulation of additional debt or delusion of current shareholders.
Looking forward we think it is important for investors to revise their expectations for market returns in the 2020s, using financial fundamentals instead of historic returns to set return expectations. We are able to provide such perspective for your portfolio upon request and contrast them to historic returns and most importantly your financial planning needs.
As a result, it may be necessary for investors to make adjustments to their current financial plans. Increasing contributions, reducing spending or preparing for higher tax obligations and future tax hikes.
Sterling Edge Financial will be providing portfolio risk updates to all investment advisory clients in May of 2021. These reports will also include estimated rates of return. Clients are encouraged to take a moment and update their Investment risk profiles. Don't have a risk profile? Click here to get one.
Investment Reviews and Homework
This month find time to update, review and confirm contributions to your investment accounts and savings accounts. This information will help us revise and update progress toward your financial goals and financial plans.
- How much are you contributing to your savings account(s) per month?
- How much are you contributing to your retirement accounts or employer
- Are you receiving a match from your employer? If so, how much?
- Do you have additional resources you could use to accelerate the accomplishment of your financial goals? (tax refund, gift, inheritance, bonus, promotion or annual pay increase)