New investors drawn in by GameStop need to dial down expectations
The hype around GameStop’s shares and Reddit users chasing other stocks higher may not have made everyone rich, but it will have opened the doors to greater interest in investing.
That must be applauded as it is so important for people to try and generate good returns for their hard-earned money over the longer term.
For all the criticisms about the tactics used by social media communities to talk up certain shares, it is worth considering that the stock market has just received global news coverage. Normally that would only happen if markets were crashing.
This unprecedented spotlight on markets should have got more people talking about buying shares. That’s great, but only if they have the right expectations for the level of money that can be made.
GameStop delivering 100%+ gains in a day sends the wrong message about investing. For the uninitiated, it implies that getting rich from stocks is fast and simple. Ask anyone who has been doing this for a while and you’ll know that investing is more of a get rich slowly game.
If you’re new to investing, or you know someone who is and want to help them, just consider that 100% gains in a day is extremely rare. So is a near-50% single day drop which GameStop has also just experienced. These wild gyrations would leave anxious people dazed and confused as to what’s happening to their money.
You need to be able to sleep at night when investing which means knowing your limits with risk levels and what’s realistic in terms of returns.
A 2020 study by Barclays found the average annual return in the 10 years to the end of 2019 for UK stocks and shares was 4.9%, adjusted for inflation. The previous decade saw a 1.2% average annual loss. In the 10 years to the end of 1979 the figure was a 15.6% average annual gain.
US stocks did better at 10.2% average annual return for the 10 years to end of 2019, or 6.1% a year over 50 years (UK: 5.3%).
You’ll see these figures are nowhere near the level of GameStop’s recent daily performance, and that it is possible to lose money as well as make it.
You can have very good years, such as in 2020 where many stocks and funds did very well. But in general, you should have much lower expectations for returns. We’d suggest 7% to 10% would be a far more realistic goal (not adjusted for inflation).
The other important factor to consider is that should the GameStop/Reddit bubble burst, it won’t necessarily mean game over for all shares, so don’t give up at the first sign of failure. There are plenty of decent companies on global stock markets which should continue to deliver strong returns and it’s really a lesson about buying quality businesses.
GameStop and many other Reddit-inspired stocks that have been trying to go to the moon are low quality. At some point valuations will come to the forefront and prices could easily fall if company share ratings cannot be justified. The frenzy will inevitably die down and investors who are here for the long haul will likely shift their focus back to companies in good financial shape with strong earnings growth.