More people are investing today than ever before. The COVID-19 pandemic gave people a little extra cash in the form of stimulus checks, plus more time to explore new ways to invest their money. It certainly helped that the market made a stunning comeback following its brief crash in March 2020 — with the S&P 500 ultimately gaining more than 18% for the year — and the fact is, about 15% of current retail investors began investing in 2020.
By Casey Bond
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The Democratization of Investing
JMP Securities estimated that about 10 million new clients joined the brokerage industry in 2020, with more than 6 million of them flocking to investing app Robinhood. With features such as fractional shares, IPO access and commission-free trading, users can buy into just about anything without the help or guidance of a financial professional.
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“In the digital era, investment options have expanded dramatically,” said Micah Carnahan, a crypto and fintech specialist at Finder.com. “In today’s app based environment, the average person is no longer dependent on large investment companies to manage their portfolios.” That, he said, is a great thing for individuals craving sovereignty over their personal financial decisions.
But with that freedom comes a wealth of risk.
‘A Disaster Waiting to Happen’
That’s how Scott Alan Turner, a CFP and consumer advocate, describes the current situation.
“Anyone that hasn’t experienced losing half (or more) of their investments doesn’t know what it takes to be a long-term investor,” he said. Over the past 10 or so years, Turner said most people have come to believe they are good investors. Not because they are, but because just about everything has gone up in value. “People who have gone through a crash or two and understand the cycles of the market have a better grip on risks and returns.”
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On the other hand, he said that if you’re going to take major risks with your money, it’s better to do so when you’re younger or just getting started. “You’ll have time to recover from the big mistakes,” he explained.
Ultimately, this new era of investing means more people have wider access to different investment types at a minimal cost. As a result, the average person has the freedom to develop their own wealth-building strategy, without padding the pockets of a financial advisor or broker.
That said, there’s also much more opportunity to lose. “Plenty of people love to invest in Tesla just because they own one or see one on the road. Or maybe because Elon is the richest person in the world and sends funny Tweets,” Turner said. “If you asked them if they read the company balance sheet of Tesla, they would probably reply, ‘What’s a balance sheet?’”
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In other words, it’s important to learn the fundamentals of investing before committing your hard-earned money, and avoid buying any asset until you really understand it. “For investors looking to diversify into digital assets, it is important they weigh the risks of this nascent investment class,” Carnahan said. “The volatility of cryptocurrencies, for example, along with the growing threat of exchange hacks, are important considerations for newcomers in the space.”
The bottom line — all investors should do their due diligence and make sure they are completely comfortable with the risks. Turner added that if you can’t explain an investment to a 5th grader, it’s a sign you aren’t actually investing, just speculating. And that truly is a recipe for disaster.
