The stock market has been all over the news in the past week or so because of the craziness surrounding GameStop stock. For a new investor, events like this do nothing except provide extra stress. The volatility of the market is already a stressful thing for new investors, without mentioning confusing market forces. Even worse, most explanations include so much technical jargon that it only adds to the confusion. So what can us regular investors do when stock market madness happens?
Our Momentary Madness
The craziness in the market right now is being driven by GameStop stock. How can a video game seller become the center of a national stock controversy? Because of social media. There is a group on Reddit called Wall Street Bets, which is often focused on insane speculation in the stock market. Many times the “strategies” involve exploiting inefficiencies in free trading apps such as RobinHood. Right now, the group noticed that many large hedge funds are “shorting” GameStop. Essentially, this means that they are betting money that GameStop’s stock price will fall in the near future. The technical description of how this works is more complex, but that’s really what it boils down to. In response, the folks at Wall Street Bets have coordinated a large scale purchase of GameStop stocks, causing the price to rise. This means that the hedge funds that are shorting GameStop are losing billions (yes, with a “b”) of dollars. GameStop hasn’t changed at all as a company, yet the large scale stock purchasing has led to its stock price increasing from $19 at the beginning of the year to over $300 as of writing.
Market Madness for Index Funds
“But Frugal Jon,” you may ask, “your index fund investing has made you miss out on the massive jump in share value. If only you had bought GameStop stock at the bottom, think of how much money you’d have!”
Well, dear reader, I am not NostraJonmas, but I can tell you that GameStop’s meteoric rise will not go on forever. Someday, and most likely in the near future, the stock price will crash back down to earth and many people who bought into the hype will lose a lot of money. As a buy and hold index fund investor, chasing short term gains with individual stocks is too risky. This situation is unprecedented, but like the Bitcoin craze of 2017, many of the speculators will lose money. Even if there is money to be made, I have no reason to assume that I will have the luck to buy in and sell at the right time. Even so, I double checked the holdings of Vanguard’s Small Cap Index fund and it owns shares in GameStop. So my portfolio has received gains from the zaniness occurring around their stock value.
What I'm Doing Different Now
Nothing. My investment strategy is not changing. I still believe in the power of index fund investing. Simply put, I do not believe in my ability to predict when to buy and sell individual stocks in a normal market environment. I certainly don’t think I can time the market correctly with the GameStop stock craziness. It’s great that some people made a lot of money off it, but I will not be in their number. Instead, I received a smaller boost to my index fund portfolio while taking on much less risk. And since I’m trying to build up over time, not all at once, that’s good enough for me.
Pre-release Update
Before I was even able to release this post, the situation has changed. RobinHood and other brokers have made it impossible to purchase shares of GameStop, causing the stock price to drop by hundreds. Then the next day the price bounced back up towards its previous maximum after RobinHood resumed limited trading amid a lot of backlash. The situation is still very volatile!
Did you buy into GameStop or any other Market Madness recently? I’d love to hear about your experience! Leave a comment below!