By Wayne Duggan
One of the biggest headlines on Wall Street in 2021 has been so-called social media “meme” stocks like AMC (NYSE: AMC) and GameStop (NYSE: GME). Fundamental investors are pounding the table claiming that AMC and GameStop have businesses in fundamental decline and valuations bordering on the absurd. Meanwhile, many meme stock traders aren’t concerned about issues such as cash burn, debt or share offerings.
The two sides seem perpetually at odds. And that’s because they’re playing different games. The fundamental investors are thinking about the long term. The meme traders are thinking about the short term.
Investing: For the Long Haul
The stock market is extremely volatile and unpredictable on a day-to-day basis. However, the longer you extend out your investing horizon, the more remarkably consistent the stock market has been.
In fact, since 1926, the rolling 30-year average annual return for the S&P 500 has always stayed between around 8% to 15%. This includes any 30-year stretch, including the Great Depression, World War II, the dot-com bubble and the 2008 financial crisis.
This remarkable long-term consistency is one of the reasons financial advisors typically suggest a diversified approach to long-term investing, especially retirement investing. The most heavily weighted stocks in S&P 500 index funds like the SPDR S&P 500 ETF Trust (SPY) are mega cap tech stocks like Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN). These blue chip stocks are typically considered extremely high-quality investments that help retirement investors sleep easy at night.
Trading: Looking for a Quick Profit
Why wait around for 30 years to get your 8% annual return when one stock might move 10% in a single day following a big earnings beat?
Stock traders aren’t necessarily looking for which companies are the best investments in the long term. They are more concerned with which stocks could see big moves over a short-term or medium-term time frame.
Earnings reports, geopolitical headlines and analyst upgrades and downgrades can all trigger big moves in stocks in a matter of minutes, and opportunistic traders with good timing can make big profits. Technical stock traders often don’t even care about a stock’s underlying business and instead are focused entirely on predicting price movement based on patterns and trends in a stock’s price chart.
You Don’t Have to Choose
At the end of the day, both investing and trading have their own unique pros and cons. Long-term investing is typically considered lower risk, more predictable and more responsible for a retirement nest egg. Stock trading is typically considered more exciting and presents the opportunity for huge short-term returns and instant gratification.
The good news is that you don’t have to choose one style over the other. There are plenty of traders who have boring, low-cost S&P 500 index funds as core holdings in their 401(k) or individual retirement accounts and still have fun trading stocks in a smaller, separate personal trading account.
There’s nothing wrong with generating your 8% to 15% annual returns in core long-term holdings like Apple, Amazon and Microsoft while also taking a portion of your disposable income and attempting to get rich by trading short squeezes in meme stocks like AMC and GameStop in the meantime.
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