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What the Rise in Retail Trading Means For Individual Investors

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From the news to social media, we can’t seem to escape this year’s trading frenzy in the stock market. Some people have claimed to have scored big profits from individual stocks this year, while most of us have just watched the action from afar. And those of us focused on far-off goals like retirement may be wondering: Should I try my hand at short-term trading to build long-term wealth? 

The short answer is, probably not. In fact, you can most likely tune out a lot of what’s been happening in the market lately, Joe Duran, head of Goldman Sachs Personal Financial Management,* says during a recent episode of Exchanges at Goldman Sachs. If recent market activity feels too exciting to miss, Duran says you don’t have to – but that comes with some caveats, and we outline a few of those here.

Trading and investing generally aren’t the same

It’s easy to conflate the two because they’re both linked to the market. But trading and investing generally have very different objectives, with one focused on instant gratification and the other on long-term decisions, according to Duran. When considering retirement decisions, you’re typically looking out several years in the future and making decisions that will affect you over your lifetime, he says.

“If you are making lifetime, life-changing decisions, you don’t want to be impulsive,” Duran says.

Meanwhile, traders are focused on what’s happening right now and how to make money or avoid losses. They rely primarily on instincts instead of relying on judgement, which could be a mistake when you think about the long-term. “If you are making lifetime, life-changing decisions, you don’t want to be impulsive,” Duran says. “You don’t want to be emotional.”

In short, the increased activity we’ve been seeing among active retail traders in the market doesn’t align with the principles related to saving and investing for retirement. Rather, Duran likens the frenzy to “a sugar high” adding: “This is not investing; this is speculation.”

Consider long-term trends when looking at short-term volatility 

You may be wondering what the heightened volatility in stocks means for long-term investors. “The volatility only affects you if you do something about it,” Duran advises. “I always tell people, it comes and goes. It ebbs and flows just like the waves.”

If the recent volatility in the market makes you uncomfortable, it may be time to revisit how much risk you’re taking in your portfolio, he says.

As an example, just look back to the six-week period in February and March 2020 when the S&P 500 fell more than 30%. The drop was scary, but “the stock market has continued to do remarkably well because companies adapt and change,” he says. “And this is the beauty of investing.” 

If the recent volatility made you jittery, Duran suggests it might be time to revisit your long-term strategy. “Make sure your overall portfolio has the right risk ability so that you can actually withstand whatever volatility is out there in the market.”

When to play, and when to walk away 

Whenever you do have an impulse to buy or sell, Duran says to stop and ask yourself if emotions like a fear of missing out or losing money are driving your investment decisions. “Money is not made by doing what everyone does. It’s by doing what’s right for you at every given situation.”

And if you do want to “play” in the market, Duran thinks it’s a good idea to set limits – just like you would if you were going to a casino in Las Vegas. That’s because given the dynamics in the market recently, some trades could end badly. “Unless you can control the outcome, don’t be silly enough to step in and put your future on the line.”

His big takeaway: “Don't confuse your life-changing wealth with your play money.” And a financial advisor can help you find the line there. “A good advisor, their primary job is to give you perspective,” he notes. “And understand what you can control and focus on that.” Advisors may help to steer you away from investment decisions that could mess with your financial livelihood. After all, sometimes on a long road trip it’s nice to hand the wheel off to someone else to do the driving for a bit.

* United Capital Financial Advisers, LLC, a Goldman Sachs Company d/b/a Goldman Sachs Personal Financial Management.

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