Bitcoin, Dogecoin, GameStop, and AMC are several on a list of those that for many have sparked dreams of early retirement and riches beyond their wildest dreams. Every day you miss out on these momentary “opportunities”, it feels like you fall another year behind your goals. The Fear of Missing Out (FOMO) can be a powerful emotion that often leads to frantic, short sighted decision making. There is no question many of the digital currency and meme stocks such as those mentioned have made some investors small fortunes. Thanks to social media those stories have been shared, favorited, and followed millions of times over which stokes the flames of an already hot investment environment. All of this to ask: if you’re feeling left out of the party, what do you do now? Let’s discuss the vulnerability of these trending investments, and hone-in on the purpose of the money you have saved.
As of the end of April the S&P 500 was up 11.98%, a far greater growth rate than the average annual return for the market. Compare that to GameStop growing from $400 million to $22 billion in market capitalization, a gain 5,500% at its peak. Digital currencies grew from $757 billion to over $2 trillion from the start of 2021, up over 264% as a group. This explosion in value makes 11.98% feel like it would be an appropriate daily return for your average retirement accounts. As a result, we hear more and more conversations of investments going to the moon, as if there is nothing keeping them from going up even more. You, on the other hand, should be asking at what cost and probability will social media trending investments go up, or down.
Risk can be measured by how high an investment can go relation to how low the lows could reach. The taller the roller coaster the steeper the likely drop as a result. A ratio that measures the relation of up and down versus a typical market index is defined as Beta. If a stock has a beta of one, it means that the investment moves up and down at the same rate as the S&P 500. Bitcoin and GameStop for example have a beta more than five times the risk of the average stock. This is proven by GameStop’s recent fall from $22 billion in market capitalization to roughly $3 billion, an 87% drop in a few weeks. Bitcoin has lost 35% or more of its value several times over the last few years.
The allure of high-risk, high-beta investing has been seen many times throughout history. Many have come and gone and the legends of them, like a good fishing story, grow. What disciplined investors have learned is that when an investment drops by half they will need to double the return to get back to even. More consistency over a longer period of time will help reach financial goals, while causing a lot less stress along the way. This is why for decades the concept of asset allocation has been a tremendous tool for the investors trying to reach their retirement goals. They have learned that controlling risk is just as important to their end results.
Before you invest your hard earned money, define the purpose of the dollars you have, determine what return you require, and stay disciplined to that target. Of course, you can also find a financial professional you trust and collaborate with them. A prudent investor has a plan and sticks to it. If you have money to gamble outside your financial plan, do your homework and invest wisely. Just don’t let the fear of missing out disrupt your path along the way to your ultimate retirement goals.