4 investment trends in the spotlight: Do they really deserve the attention?
Some call them hot, others call them not. Here are the facts about a few buzzy investment trends.
Read, 4 minutes
There’s a lot of chatter online about investing these days, and you’ve probably heard about “meme stocks” or other types of speculative investments. But how much do you really know about them? Though it can be tempting to jump on the bandwagon, it’s important to do your own research before making any investment decisions, verify the trustworthiness of online information sources and understand the risks involved. Some types of short-term investments, for example, could lead to substantial financial losses.
Here are four emerging investment trends—and what to consider beyond the buzz.
What are they?
Meme stocks are stocks whose prices can skyrocket after going viral online. The price increases are fueled by individuals who may be drawn by nostalgia, a funny backstory, or a desire to ding big investors who are betting the stock price will fall (commonly referred to as “shorting the stock”). Investment “tips” for meme stocks proliferate in social media feeds and message boards.
The catch: The newfound notoriety of these stocks may have little to do with the actual performance of the company. As a result, these stocks may be overvalued and can experience dramatic price drops, often within short periods.
Remember: Before you follow the information obtained online, research the company. Public companies file information with regulators, including information about their business, financial results and risks. You may also consider reading analysts’ reports and news articles about the company.
What are they?
Speculative currencies generally refer to a type of digital money or asset, often available in the form of coins or tokens. Many types of digital money can also be bought and sold as speculative investments through an online exchange or platform. Similarly, unique pieces of digital assets, such as artwork or sports cards, can be traded through a virtual marketplace.
The catch: Digital currencies are a relatively new type of asset with little regulation. There are many of them, and their values can fluctuate significantly. They can be more vulnerable to fraud and have been known to support illicit activities. The computer networks used to support them can consume substantial amounts of energy.
Remember: Digital currencies and collectibles are not savings vehicles. These alternative investments involve significant risks. They are a volatile asset, and their value can drop substantially very quickly.
What is it?
Day trading refers to a rapid buying and selling of stocks and other financial products. Day traders may buy or sell shares within hours or minutes, seeking to capitalize on short-term changes in price. Some day traders may borrow money to fund their trading.
The catch: Day trading is fast and highly speculative. Doing it well requires sophisticated knowledge of the markets, as well as real-time monitoring of information that could affect stock prices. Trading with borrowed money increases the risk of suffering big losses.
Remember: Day trading is not the same as an investment in stocks of a company, where the general intent is to buy and hold a stock based on a long-term view of the company’s business.
What is it?
A special purpose acquisition company, or SPAC, is an entity that raises money by selling shares to the public and uses the money raised to acquire a private company. Upon acquisition, the private company is typically converted into a publicly traded one through an initial public offering (IPO).
The catch: Buyers of SPAC shares do not know the identity of the target private company. Instead, they are relying on the expertise of the SPAC sponsors to identify a good acquisition for their investment.
Remember: Even if a professional athlete or other famous figure has endorsed—or is involved with—a SPAC, you should still do your own research. SPACs are public companies and as such, file information with regulators. Be sure to check out the shareholder ownership rights of investors in the SPAC, and the reputation and track record of the sponsor. Also, it’s important to carefully read information about any private company identified by the SPAC sponsor.
Playing the long game: an investing approach that's timeless
Although some of these financial fads may get plenty of attention, it’s also important to focus on investing a regular amount consistently over time, rather than trying to predict when the market will move up or down. If you’re convinced something is a sound investment, consider letting time—and your money—work for you by creating a long-term strategy that reflects your goals, time horizon and risk tolerance. If you try to time the market, you could miss out on stock price recovery, dividends, share buybacks and interest payments. By building a balanced portfolio with —stocks, bonds, cash or other investments—you may be better positioned for success in the long run.
The best days make a difference
Missing the 10 strongest days of the S&P 500 Index in any
decade could have a dramatic effect on cumulative returns.
Source: Standard & Poor’s 500® Index, 12/31/20. Average annual returns are based on the S&P 500 Index from 12/31/04-12/31/20. Large-capitalization stock performance is measured by the S&P 500 Index, an unmanaged index considered to be representative of the U.S. stock market. Prices of common stocks will fluctuate with market conditions and may involve loss of principal when sold. Results assume reinvestment of all distributions, including dividends, earnings, and expenses, and are not indicative of any past or future returns of any investment. It is not possible to invest directly into an index. This is a hypothetical example. Past performance is no guarantee of future results.