It seems that in the last few years everyone has made great strides in the stock market.
From the AMC and Gamestop meme stock craze in 2021 to the NFT explosion and countless anecdotes about people throwing their day jobs into day trading, you may feel left out if your portfolio doesn’t crush it.
And this is partly true – almost everyone really broke it the last few years (up until recently with everything that happened in the world).
To give you an idea of how light the market has been, from January 1, 2019 to March 29, 2022, the S&P 500 rose 85% and the Nasdaq 100 rose even higher by 140%.
Moreover, as of March 23, 2021, 95.9% of the roughly 3,000 stocks in the Wilshire 5000 total market index had a positive total return over the previous 12 months. No other year has come close to this since the end of February 2004, when 93% of stocks had positive 12-month returns.
So yes. Making money in the stock market was pretty easy.
And as millennials and Gen Z suffer from student loans and financial uncertainty, new investors are tempted to take on more risk to achieve their desired financial goals. Sounds familiar?
If you are a new investor who has made some profit in the market or is trying to maximize profits on platforms like Robinhood or Webullit’s never a bad idea to take a step back, evaluate what you’ve been doing and see if you’re at risk of losing your savings.
Here are four questions to ask yourself.
1. Do you know what the real market return should be?
While it may not seem like it, the average return of the S&P 500 (the typical US market return standard) has historically been ~10.5% per annum (before inflation) over the last century.
This probably seems low given what many have experienced over the past few years. And you won’t be alone if you think so.
A recent survey of individual investors by Natixis Investment Management found that U.S. investors expect to earn an average post-inflation annual return of 17.5% over the long term, significantly higher than professional investors’ expectations and what has materialized historically.
Why is this important when it comes to not spending your YOLO savings?
As an investor (especially a beginner) you should always have clear and realistic expectations about what the market returns are. Armed with this information, you will be forced to be more critical about how to make your money work, because making more money usually comes with more risk.
Every professional investor measures himself with a standard, and this standard determines his investment strategy.
To avoid getting into a potentially bad situation, make sure you know what you should be comparing yourself to.
Read more: What rate of return should you use for retirement planning?
2. Do you invest or trade?
For many new investors, the word “investing” today may mean very different than it originally did. Historically, “investing” meant making your money work for the long term using a “buy and hold” strategy.
Trading, on the other hand, is about making short-term profits by buying and selling stocks or other financial assets such as options.
Based on recent events, you might think that the best way to make big profits is to trade, and that by trading you become an investor. Don’t confuse the two.
Years of research on this topic has come to the conclusion that most individual traders rarely outperform the market, and active traders end up much worse. For example, a recent study of intraday traders found that almost 80% of them lost money over a 12-month period, with an average loss of 36%.
While it is possible to increase your returns through trading, long-term diversified investors who avoid unnecessary risk and rarely trade are almost guaranteed to come out ahead.
If you want to keep your savings on YOLO, know the difference between trading and investing and only use the money you can afford to lose into high risk, high reward trading activities (after all, everyone needs a little fun sometimes) ). ).
3. Do you know your risk tolerance and ability to take risks?
How would you feel if you lost $5,000 and the next day you had to pay for unexpected expenses like a car breakdown? Can you still easily pay these expenses?
This scenario gets to the heart of the difference between risk tolerance and risk appetite.
Risk tolerance is your emotional capacity and the necessary means to take risks (and bear potential losses) in order to achieve your financial goals. This is a choice that can be made in search of higher profits.
Risk tolerance is your ability to manage financial losses.
In the scenario above, if you lost that $5,000 because you bet on a hot stock (knowing you could lose everything), that means you are high risk tolerant.
However, if you lost that $5,000 and weren’t able to pay for repairs to your car, you’re at low risk.
If you don’t seriously consider these two concepts and how they affect your investment decisions, you are likely to put your financial and emotional well-being at risk.
This is especially true if you are trading. To prevent YOLO from wasting your savings, understand your true risk tolerance and ability to take risks. This will help you avoid potentially embarrassing or painful situations.
Read more: Reserve funds: everything you need to know
4. Are you clear about what you own and why?
In the midst of the meme stock craze, you may have come across many stories on TikTok or Instagram about aspiring investors claiming they have no idea what they’re doing but are still making money.
During uncharacteristically good markets, these people often find themselves in the spotlight (despite how unpleasant and unfair it can be).
I am not saying that you are one of those people (otherwise you would not be reading this article). But can you confidently look at your Robin the Hood portfolio and tell in detail about everything, what do you have money for and why?
If you can’t, you are seriously at risk of losing your YOLO savings for several reasons.
First, if you don’t know what your money is, you have essentially entered the casino and walked up to the roulette table.
The same applies to ignorance What for you have invested in what you have.
When times get tough, you probably won’t know whether to sell, buy more, or just bide your time. In good times, you won’t have a sense of when to sell or just hold on.
I know it can sometimes be tempting to jump on someone’s new idea in hopes of big wins without doing your own research. We all did it, including me.
If your risk appetite and tolerance for risk is high, doing this once in a while can work and even be fun. But in general, if you do not want to spend your savings on YOLO, understand what you own and why.
Featured image: ComicSans/Shutterstock.com
