“If only I had invested in (hot stock of the day), then I could have paid off all of my student loans in a year!”
When bubbles, such as the recent GameStop bubble created by social media users, occur, it can be too easy to chastise ourselves for not investing our money for a quick fix solution to our problems. But in these cases, it is important to remember that the market is not necessarily predictable, and it is definitely not your friend. The market is essential for many facets of our lives, such as retirement, but it works best in the long term. When the market plummets, as it inevitably will (for example, March 2020), needing to sell off assets to finance your lifestyle means you miss out on the rebound (say, April 2020).
“But my friend invested his whole life savings into GameStop and became a millionaire overnight! Why would I turn that down? Sure, it sounds risky, but if it happened to him it could happen to me!”
Unfortunately, these are the sentiments that lead to the worst troubles, and are the epitome of what characterizes a bubble. Of course, the people who bought the stock, in this case, GameStop, when it was trading at $19.94 on January 12th had a nearly 2,300% gain on GameStop stock if they chose to sell at the high on January 28th. But for the innocent bystander wanting to get into the action who bought at the high of $468.49, they would now show a loss of 45% if they panicked and sold out the very next day, January 29th. If they had decided to wait a few days, hoping it would rebound (because stocks only go up!), they would show a loss of 84% if they sold on February 5th.
Now, let’s say you decided to take the $20,000 you have in your savings that you have been hoarding for that inevitable tax payment when your student loans are forgiven, or for that first down payment on the house, or the emergency fund, and put it into the market. All into GameStop. Who needs diversification when it was a sure thing for your buddy, the latest millionaire? If you had lost 45%, you would have lost $9,000 in one day. If you had lost 84%, you would have shrunk your $20,000 down to $3,200.
As this example clearly displays, making money takes a lot more time than losing it. When something sounds too good to be true, it probably is. There are no guarantees in the market. Making a costly mistake when you are in your thirties with an investment in your retirement account is disheartening; losing all of your necessary cash for your immediate commitments is catastrophic.
Disclaimer: InsMed Loan Advisory Services, LLC does not provide investment or tax advice. The information is provided for educational purposes only.