Key Points:
- The GameStop story has been entertaining, but should not be much more than that if you're an investor (as opposed to a trader).
- Your path to building wealth and retiring comfortably has not changed.
- If institutions do in fact have structural advantages over individual investors, individuals can still come out on top in the long run.
We've got nothing to add to the GameStop saga--what happened and why, its David-vs-Goliath narrative (only half true), what more should be done to protect individual investors from themselves (if anything). The story has been a godsend for the financial media. Investors can't seem to get enough of it.
But we will use the whole spectacle as a launching pad for an article about the importance of staying the course (among other things).
Looked at from one angle, the stock market is a rigged game. It can be easy for smaller investors to get discouraged and wonder if they should even bother participating. They see phrases like "dark pools" and "payment for order flow," and read about how some traders have millisecond advantages to help them make big profits, and might think they would be better off just leaving their money in a bank account.
If the game is rigged, though, you still can't afford not to play it. The consequences of sitting it out can be dire. And anyway, in the end, there's still a very good chance you'll beat those doing the rigging if you just keep your head down and do what you know you need to do.
Don't Just Do Something, Stand There
In so many aspects of our lives, we need to compete to win. In investing, it's basically the opposite: You almost need not compete at all. In fact, thinking of it as a competition can be detrimental, leading to rash decisions that leave lasting damage.
That's a very difficult concept to get our heads around, the idea that we can win without competing. What coach tells a basketball team to just go with the flow? Who thinks a marathon runner can go out there and not pay any attention to the other runners in the race and yet still win the race? We're used to believing that winning requires a lot of effort, and maybe even a lot of strategizing as well.
In fact, we are competing against something. It's not "the house," meaning the banks and brokerages and market makers that serve as the market's infrastructure and sometimes take a vig here and there or seem to have an unfair advantage sometimes. It's not traders--remember, you're an investor, not a trader. Trading is an entirely different game than the one you're playing. But you're not even competing against your fellow investors--ones who might seem to be making all the right moves while you stumble along.
No, your real competitor is one you can't see: Time.
You know this already. The rules don't change. Start early and save your money, invest your money, and keep your fees low by investing in index funds. That's how you put yourself in a position to have a successful retirement plan. The real risk to your plan is not missing out on "hot" opportunities, but rather starting late--giving time a leg up.
The beauty, or irony, is that the chances are very good you will beat all of those other entities you might mistakenly think of as the competition--hedge fund managers, talking heads on CNBC, even most mutual funds--the longer you stay in the game. Reversion to the mean happens; active management will have some great years and some bomb years, but over time won't be able to keep up with the returns low-fee index funds provide.
If you start looking at mutual fund or ETF screeners to see who has the hot hand, yes, you'll see some eye-popping numbers over the trailing 12 months, or maybe even over a few years. You might experience some pangs of the fear of missing out. But as you increase your time frame to several years, those returns will settle down; you won't see the same funds hitting those numbers year in and year out. You'll start to see more index funds on the list.
Here's one example. A quick look at Morningstar's Premium Fund Screener says that only about 10% of all mutual funds have outperformed the S&P 500 index on an annualized basis over the past 15 years. Meanwhile, you have multiple low-fee ways to invest in that index--and plenty other indices. Why handicap yourself with active management and high fees when the probability of beating an easily investible, diversified portfolio of securities is so low?
Ignore The Noise
Structural changes to the equity markets might be needed to make the playing field more level. But for most people, what's far more important is just saving and investing as much money as possible. Much of the rest is just a distraction.
It probably won't be long before we see the next iteration of a GameStop-like story. It could be some new cryptocurrency, or SPAC fever going to the next level--it's impossible to say exactly what it will be. Regardless, treat it as you would if you were to walk by a craps table in Las Vegas when somebody just hit it big, and there's lots of cheering. "Good for them," you might say, and move on. You probably would not think, "Dang, I should have been at that table!"