We all saw the stories. Recent headlines involving the subreddit “r/wallstreetbets” and short squeezes in specific stocks was a perfect storm of attention-grabbing news.
Entertaining, sure. But what’s the takeaway for everyday investors?
Here’s the thing. What captures the attention of the media and the general public is often not what really matters for serious long-term investors. In the short run, events that involve individual stocks and big market moves can be more interesting than slow-moving economic progress. After all, flash crashes, short squeezes, bankruptcies, accounting fraud, personal scandals, and other headlines are fun to read about. Whether the economy grew by 4% or 4.2%? Not so much. But the slow growth is what allows everyday investors to achieve financial freedom. Not the bright shiny flash in the pan.
A disciplined long-term approach is what matters
There are many different types of investors with distinct goals. What unites them is this: Nearly a century of research and experience have shown that taking a disciplined, long-term portfolio approach is how investors can best achieve their financial goals. Doing that is not usually flashy, fun, nor fast. It can require investors to endure difficult periods of market stress and to resist the natural urge to overreact.
Taking this approach through a managed portfolio where the investments are managed for you can help you to stay on track and disciplined. And over time, being diversified can allow savings to grow into real wealth. This is not to say that opportunities across individual stocks and sectors don’t matter —they do. But they should be viewed from a portfolio perspective rather than as one-off bets.
Market ups and downs are to be expected
“Retail investors” have always formed a very large and important constituency — that’s nothing new. Nor is it new for investors — both retail and institutional — to follow the herd, whether led by newsletters, sell-side research, famous stock pickers, TV personalities, or, in this case, a subreddit. Short squeezes are also part and parcel with normal market behavior, even if it does mostly affect hedge funds and other institutional asset managers. What is unusual is that the size of the short squeezes and the dialed-up anti-establishment language helped to magnify the attention on this activity.
Market fluctuations are sometimes mostly noise
The good news: The economy continues to show signs of recovery
What was lost in last week’s market coverage was much less exciting but easily more important to long-term investors. Specifically, the latest GDP report showed that the final quarter of 2020 grew at a pace of 4% and, overall, the economy shrank by 3.5% last year. While this is negative, it is far better than many had expected at the onset of the pandemic when there were fears of a second Great Depression. At the moment, economists forecast that GDP could return to pre-pandemic levels around the end of 2021. This is the biggest driver of the stock market’s steep recovery over the past nine months.
Stay focused on your goals
For everyday investors, it’s important to focus on the light at the end of the tunnel as vaccines are distributed and the economy continues to recover. Although recent headlines are eye-catching and could have some implications for market dynamics, they are not the primary driver of investor returns.
There will always be headlines trumpeting specific names and activities in the market but better to focus on the long term. It’s been proven the more active investors are the more likely they are to lose money or underperform. Investing in a diversified portfolio that invests across regions sectors and asset classes can help create balance and diversifications to weather the noise that pops up from time to time in the markets and again doing so through a managed portfolio can help investors, especially newer ones, stay focused and not have to worry about all the twists and turns specific companies may take.
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