Some years back, my two younger kids expressed an interest in investing. Admittedly, I botched their initial entry into the finance world. The recent acceleration of stock trading by new investors fueled by online message boards parallels the lessons we learned here at the Schulz house.
As we geared up to invest back then, both of my kids conducted research and decided on an initial stock investment. Gwen picked a midstream oil and gas services company, and Daniel chose a telecommunications giant. Along the way, there were a couple of others, but these were their leading picks. From the start, Gwen’s company took off. She got excited and poured more money into it. Then suddenly, an unexpected event occurred, and her stock tanked. Daniel’s stock never really did much of anything. Neither of their experiences was what they, or I, had hoped to accomplish. Soon after the initial trading frenzy, all three of us became busy with other things and lost interest.
Recent statistics suggest a similar experience for the millions of nonprofessional investors who plowed into so-called “meme” stocks in late January. Vanda Research reported recently that amateur stock investors had lagged the S&P 500 by 10% since mid-February. According to the Wall Street Journal, this less than stellar performance over the last two months has further resulted in a 60% decline in stock purchases by nonprofessional investors.
As for Gwen, Daniel, and I, we set a new course after licking our wounds. I had engaged with Betterment, a startup fintech company, to run our model exchange-traded funds (ETF) portfolios for some clients of my investment firm. So we decided to go that route.
Unlike individual stocks, fully diversified ETF portfolios capture the overall return of large segments of the market. Online companies like Betterment, Wealthfront, Acorns, and Stash deliver long-term, fully diversified portfolios to new investors. The investment experience is similar to what a professional registered investment advisory (RIA) firm like mine provides to high-net-worth seasoned investors.
Gwen and Daniel opened accounts at Betterment, and it’s been a much more pleasant experience for them. They easily fund their portfolios on their smartphones regularly. Their investments are less volatile than before. They can see how over time, their accounts will increase in value if they maintain good investing habits.
I think many of the new investors who initially plowed into stocks will eventually move to diversified portfolios. I started out investing personally in individual stocks but have primarily used mutual funds and ETFs for the last 30 years or so, and it’s worked out well. Sometimes we learn better by making mistakes. From that standpoint, Daniel and Gwen’s initial experience was not botched; instead, it was just the initial steps in building a solid investing foundation.