“Money Never Sleeps.” That was the line from Gordon Gekko, the infamous character from the movie Wall Street, played by the ageless Michael Douglas.
If you have money invested in a 401k or stocks, not only has your money not slept, it’s been working overtime.
If you haven’t noticed, Wall Street has been on a wild ride of late.
Last week your 401K took a hit, and this week it hit a boom. After the closing bell on Wednesday, the Dow surged nearly 1,800 points from the week before.
As of Wednesday, the market has swung 3,500 points up and down in just two weeks!
And since the pandemic hit one year ago, the Dow was at a low of 18,500, and almost exactly one year later, it gained nearly 14,000 points.
That’s a 73 percent increase.
So with all this volatility, how do you assess the risk vs. reward of getting into a red hot stock market?
I set up a Zoom meeting with Tampa Financial Advisor Jon Wax, the CEO of Waller & Wax Advisors. He’s been helping local families plan their financial future for decades in the Bay Area.
He says what’s happening right now, should be a lesson for all of us.
“First of all we are seeing a lot of volatility there is a lot of speculation in the market and a lot of optimism about taking in more risk, so money moving around because of the headlines is what’s causing these gyrations,” says Wax.
Some of that speculation is coming from a new kind of investor: younger, bolder, more willing to take on risk, more likely to buy in and sell out during one day with fast trading apps like Robin Hood.
They are also more prone to go on to sites like Reddit, where the stock rumors abound, driving up prices on companies like GameStop.
“It’s much like a game Of musical chairs where the music just doesn’t stop, and there’s a complacency and optimism that takes over with the assumption that 'I’ll just get out before it comes apart.' The problem is when you get into a situation like this, when the music eventually stops, there are no chairs,” warns Wax.
Then there’s the $1.9 trillion dollars about to be pumped into the US economy from the COVID-19 relief bill.
And a survey from Deutsche Bank revealed most young investors plan to spend almost half of their stimulus checks on stocks, fueling an already expanding bubble.
The key question: are less experienced investors creating more volatility or more opportunity for everyone regardless of income? Wax says it depends on how they’re doing it.
“So it’s not a bad that people are getting into the investing or finding the market and participating, what is critical is, in the long run, the style and method being used and the strategy being used for investing,” says Wax.
And what is the strategy? Slow and steady wins the retirement.
Think more Buffet. Less Gekko.
If “greed is good”… patience is better.
Wax says the best strategy is be patient and balanced in your approach to buying stocks.
“It’s important that investors understand, there are times when it seems really easy, and then there are times where it’s really hard, and reality is a blend of both. The best thing that people can do is remember an old saying from Warren Buffet: he says be greedy when others are fearful and be fearful when others are greedy, and right now there’s a lot of greed out there so we don’t know when… but it would be good idea to make sure your portfolio is spread around well,” says Wax.
The bottom line is if you are going to play the market and do your own investing, make sure you buy a mix of safer assets versus riskier stocks.
The general rule of thumb is you want a 60-40 split: 60 percent stocks, 40 percent bonds. And that equals 100 percent balanced.