Making mistakes with your investments can be costly. Investing in the wrong asset or at the wrong time could be the difference between tens of thousands of dollars in gains versus tens of thousands of dollars in losses. And if you do suffer losses and aren’t able to recoup them, you might not have enough time left in your investing career to make up for them.
There’s one investing mistake that many investors are making today that could end up costing them dearly. It’s an entirely avoidable mistake, one that millions of investors have made over the decades, and one that millions more will make soon. Unless you avoid this mistake, your retirement savings could be in jeopardy.
Staying in Stock Markets Too Long
The mistake that most investors make is staying heavily invested in stock markets for too long. Everyone invests in stock markets while a bubble is growing, thinking that the gains will never stop. But inevitably the bubble will pop and investors will lose their shirts, at least if they haven’t protected themselves.
The temptation to stay invested in stocks and to eke out every last penny of gains is a tempting one. The fear of missing out (FOMO) has a strong psychological effect on us, and even investors who should know better end up staying in stock markets too long and overextending themselves.
The current stock market bubble is becoming more and more similar to the late ‘90s dotcom bubble in more ways than one. For those who lived through that era and remember the media coverage of stock markets and financial matters, the similarities are eerie. Here are three of the most important ones.
1. Investor Euphoria
The attitude of investors is one of the key similarities between stock markets today and the dotcom era. Investors back then were looking at nearly two decades of skyrocketing stock market growth, fueled towards the end by the growth of the internet and the belief that Alan Greenspan’s Federal Reserve had somehow tamed the business cycle and ushered in a new era of unlimited prosperity.
We were treated to visions of the future in which stock markets couldn’t lose money, and the Dow Jones would reach 36,000 by 2002 (it hasn’t reached that level yet even today). To students of economic history, it brought back reminders of Irving Fisher’s famous comments that stock markets had reached a permanently high plateau, just before the stock market crash of 1929 that ushered in the Great Depression.
Investor euphoria is similarly high today, with a majority of investors bullish and thinking that markets will rise in the near future. This is despite a massive economic contraction in the second quarter, and tens of millions of Americans still out of work. Many of these investors will find out the hard way that their euphoria was misplaced.
2. Use of Leverage
When markets push fully into bubble territory, that tends to bring in newer, less experienced, riskier investors. They have dollar signs in their eyes and think they’re going to make big bucks. And for a while, some of them might. But what helps fuel their gains, and continued rises in stock market indexes for a while, is leverage.
Leverage is the use of borrowed money to make investments. For investors who play it right, borrowing money they don’t have in order to make bets on stock movements can play out really well. The problem is, when your bets don’t turn out well, you have to pay back the money you borrowed. And if you lost money on your stock bets, that could wipe you out completely.
Leveraged investing is most comparable to gambling. Imagine betting all your money on number 7 at the roulette table, and continuing to bet on 7, and continuing to win big. You may win nine times in a row, but the tenth time you might lose, and you lose not only everything you won, but everything you brought to the table.
There’s a reason leverage is normally only something that professional investors engage in. For a financial firm that’s managing billions of dollars of stock positions, a single trader using a little bit of leverage to make a bet and losing hundreds of thousands of dollars may not be a big deal, as gains by other traders may offset those losses. But even professional investors sometimes get overwhelmed by leverage, and poor use of leverage has even taken down major investing firms.
You may be familiar with leverage and its risks, but an increasing number of investors are not. In fact, a recent survey highlighted the fact that 43% of retail investors today are trading with leverage. The increasing number of retail investors, combined with their use of leverage, is behind the recent run in stock market prices.
In fact, households with incomes below $50,000 have become the most active traders in stock markets, even more active than households with six figure incomes. While it’s understandable that those whose earnings aren’t that high want to invest their money to make gains, the fact that it’s coming at this point in time, and often with the use of leverage, is distressing. If these investors don’t know what they’re doing, they could lose all the money they’ve invested, and then some.
3. Options Interest
Along with borrowing money to invest, interest in options trading is surging once again, just like it was during the dotcom bubble. In fact, the average daily value of options traded exceeded that of stocks for the first time in July, and it’s only gotten worse from there.
This isn’t the place to explain how options work, except to say that, unlike what you may read from some options trading proponents, it is possible to lose money by trading options. And if you’re borrowing money to buy options, you’re in double trouble.
Options trading isn’t new, nor is interest in it. But stories of 16-year-olds trading options to try to make money today brings back memories of similarly aged teenagers trying to do the same thing in the late ‘90s. Inexperienced investors have been incentivized by the Federal Reserve’s liquidity-fueled stock market bubble into thinking that they can’t lose money by investing in stocks or options. They’ll find out the hard way that that’s not the case.
What all of this has in common is the view that investing is a get rich quick scheme. None of these “investors” are looking for stocks that will hold their value over the long term, stocks that will provide dividends for decades, or stocks that will anchor their retirement savings. They’re looking for quick profits, then moving on to the next opportunity. That type of investing strategy can work for a while as long as the Federal Reserve is filling the stock market punch bowl with excess liquidity. But once the liquidity dries up, or becomes less effective, those imbibing the punch will end up with a nasty hangover.
By contrast, investing in gold is a strategy favored by many investors for long-term stability and asset growth. Gold may not have the allure of stocks and options, but it’s a capable performer nonetheless. Since 1971, gold’s annualized returns have exceeded those of stock markets, while its performance since 2001 has more than doubled that of stock markets.
While it’s certainly possible to use leverage and options to invest in gold, that type of investing makes up a small portion of the gold market. By far the greatest interest in gold is for hedging against inflation and financial turmoil, protection of wealth during market upheaval, and long-term asset appreciation. And for most investors, that means investing in physical gold coins and bars.
One way of investing in gold that is gaining in popularity is through a gold IRA. A gold IRA allows you to invest in physical gold coins or bars while still enjoying the same tax treatment as a conventional IRA. You can even roll over existing retirement savings from 401(k) or IRA accounts into a gold IRA, thus allowing you to lock in your stock market gains now and move your funds into gold before stock markets crash.
If you’ve seen the writing on the wall and realize that stocks are due for a major correction, you may have been wondering how to protect your assets without taking on huge tax liabilities. Now that you’ve heard about the gold IRA, isn’t it time to learn more about it? Contact Goldco’s experts today to find out how you can protect your retirement savings by investing in a gold IRA.