Seemingly everywhere we look, we see reasons to be pessimistic. Be it an all-time-high new jobless claims number in the U.S., or the Canadian unemployment rate in rising to 11% of the labour force. But the coronavirus crisis doesn’t scare retail investors; alongside record bearish news, we see a skyrocketing market and a new peculiar trend emerge: Interest in the stock market by retail investors.
The following is a guest post by invitation. Thanks to Leo Gutierrez .
The Great Pause of 2020.
The economic damage created by the Coronavirus has been swift and dramatic. With a complete shutdown of retail businesses, tourism collapsing, and social distancing in place, the global economy has not seen such an acute economic crisis since the great depression.
Add into the mix a price war between Russia and OPEC which had a domino effect that savaged many oil companies and led to oil trading at negative prices for the first time in history, and you’ve got an explosive combination of black swan events.
Small businesses were crushed by the shutdown measures. Many of these mom-and-pop stores don’t have the cash cushions and lines of credit that the Fortune 500 companies have to stave off the temporary collapse in demand. The full extent of the damage is not yet fully understood, but we can reasonably expect a wave of shutdowns in this area. Large companies haven’t had it any easy either – just recently retail giant JC Penny filed for bankruptcy. It truly seems that no one is safe.
Governments around the world have stepped in to try and protect the most at-risk industries such as flight companies and the oil sector. There have also been stimulus packages across the globe meant to help the average person on the street recover from their loss of a job. In Canada, this has been in the form of a $2000 taxable benefit (CERB) for up to four months, as well as other benefits like employment insurance, tax credits, and deferrals on mortgages and student loans. In the US, one-time paychecks from the government have been handed out and unemployment benefits have been extended. That’s just the fiscal side of the government’s response.
Applying what they learned from the Financial Crisis.
On the monetary side, governments around the world have learned from the great recession of 2008 and were quick to deploy tools such as quantitative easing and slashing rates. Powell himself claimed that the Federal Reserve would do everything in its power to keep the market from collapsing.
This monetary policy might just be doing the trick, as despite all pessimism, we appear to be in a V-shaped recovery on the NASDAQ and S&P 500. That brings us to the main point here: What is happening in the markets and how are retail investors reacting to it?
Related post on the economy from Dale – A V-shaped recovery? Fugggedaboutit!
Business Is Booming for Retail Investors
If you look at the Google Trends result for “stocks”, you could see a sharp increase in interest from the beginning of March, as markets around the world tanked, you could see an almost inverse correlation between the two. Retail investors were seizing the moment.
Shouldn’t people be running from the markets like a house on fire?
Well we must note a few things here to make sense of it all. Firstly, in 2020 we have an entire generation of working age who have never experienced a bear market as investors. They have been kids, or in college in 2008, who then got to ride the longest bull market since the 1980s. This would give anyone the overconfidence to just ‘buy the dip’, which it appears is what many retail investors did.
The internet provides endless research opportunities.
Next, the internet has provided a whole new medium to learn financial literature, much of it completely free. Now, are all these YouTube gurus really market wizards? Probably not. But there is definitely some very high-quality content out there open to everyone. You now may have a mass influx of retail investors listening to these YouTube channels explain to them that this is the buy of the decade.
Finally, and what I believe has had the largest long-term effect retail on investors as whole: Technology has never made it easier to access investment brokers from the comfort of your home (where many people are stuck). Further innovations in robo investing and index ETFs mean that many investors can set up a diversified, low-cost portfolio as easy as they could look up their bank statement on their phones.
It remains to be seen if this new, low barrier for entry could be setting up many unprepared retail investors for a world of hurt; but in the meantime, we’ll be busy staying informed and prepared.
How Can We Avoid Investing Traps?
Every week we have another investing legend publicly urging caution, be it Warren Buffett or David Tepper. No doubt we are going through interesting times. There are a few key points all investors should keep in mind going forward:
With volatility in the stock market historically high, and no one really sure as to what will happen week to week, investors need to accept the possibility that this market could be heading lower just as it could be heading higher. The easiest solution is to diversify your portfolio both by assets (Stocks, bonds, commodities) and by making sure your portfolio isn’t too concentrated. After all, in a crisis all correlations can go to 1, as stocks are indiscriminately vulnerable.
Keeping A Long-Term Mindset
While I mentioned week to week changes above in the grand scheme of things: Investing is a patient man’s game. Over the long term, the simple buy-and-hold strategy has beaten most market timing strategies, and the longer the time frame, the higher the failure rate of those who try to pick tops and bottoms.
Finally, with all the hype and media exaggerations, it’s easy to succumb to the fear of missing out (FOMO), it’s one of the most common investing traps that can easily ruin your performance. It’s simple: Why do you want to buy this? If you haven’t really analysed a reason other than “its popular”, take a pass.
It can be hard to watch a trendy stock shoot up, but we have to stay grounded in reality – we are still in a pretty precarious position in the market, and you need to think defensively when it comes to your portfolio.
What management fees are you paying? Are there lower-cost alternatives? And I really hope you are not paying a mutual fund manager to basically follow the index! If you want a more active portfolio, today there are many ETFs for defensive investing while still capturing upside potential. Many of these ETFs focus on investing in low volatility stocks, perfect for the environment we find ourselves in today.
Should Retail Investors Be Panicked?
As we start to see some reprieve from the pandemic, we have to ask – is this influx of retail investors a good or bad thing for the markets and economy as a whole?
Firstly, we need to separate the market from the actual economy, as one does not equal the other. For an economy, it is probably a good thing in the long term for a higher percentage of households to own a piece of the market and grow their wealth over the long term.
For the market however, as mentioned before, many of these investors have never experienced a real bear market, and they could just as easily add to short term volatility. With that being said, let’s be optimistic; we may be seeing an entirely new generation of intelligent investors at work!
Aside from the nine-to-five as a PR and SEO strategist, in his spare time Leo G is also a recreational blogger of all things finance and tech. Leo studied international politics at Arizona State and creative writing at Scottsdale Comm. College. For fun you can find him attached (via cord) to his Super Nintendo. Leo’s on Twitter @A2ZLeoG.
Thanks to Leo for this wonderful post. It’s nice to hear from those who are younger, with a long term time horizon, and much optimism. I hope to have him back on the site.
The risks are certainly different for those with a very long term time horizon. Several weeks ago I had posted on how dollar cost averaging worked in The Great Depression.
Be safe. Be careful out there.
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