Once the herd starts moving in one direction, it’s very hard to turn it, even slightly.
If you watch financial news at all, then you probably have seen all of the digital ink that has been spilled over the wild swings in Gamestop stock since the beginning of 2021. Let’s be clear, some people who got in early and made the right moves, made TONS of money.
Good for them.
While we’ve taken moonshots in our investments, particularly trying to catch a rebound in the stock market after the initial wave of the COVID-19 pandemic, I cannot claim that I was able to ride my diamond hands to the moon (that’s a WallStreetBets reference from Reddit in case you didn’t know).
Getting more people investing is a good thing.
Getting more people trying to replicate Roaring Kitty is not a good thing.
Research from Cal Berkeley’s Terrance Odean and Cal Davis’s Brad Barber shows that individuals who are active traders underperform the broader market indices. While this research was conducted before the advent of $0 commission trading, it showed that net of costs, active traders underperformed by 3.6% ANNUALLY.
That might not seem like much, but, over the course of time, it can be devastating.
Let’s assume two people, an indexer who roughly mirrors the market and gets a 9% annual return, and an active trader, who underperforms and gets an annual 5.6% return, both invest $10,000. After 30 years, how do they do?
At the end of the 30 years, the active trader has $48,441.56, while the passive indexer has $132,676.75.
That’s $84,235.19 of underperformance all because the active trader thinks that he or she is smarter than the market.
I readily admit that it’s hard to just sock it all away in VTSAX or whatever and fuggedaboutit. There have been time periods where I’ve had some riskier investments, and times when I’ve been all in on the index funds. There are times when it’s REALLY tempting to try to catch the next Gamestop (or pets.com or whatever your meme stock du jour is).
How to Give Yourself a Sucker to Distract Yourself From the Injection
Do you ever notice that family care practitioners have suckers or candy in the office?
Let’s ignore the fact that sugar is horrible for your body, which is another irony, including that a lot of doctors smoke, and focus on what they are trying to accomplish.
Right before the caregiver jabs a kid with a shot, they usually try to distract the kid with something that will take the kid’s attention away from the fact that his or her body has just been pierced with a sharp needle, causing minutes (which seem like hours) of screaming and bawling if not addressed.
Hence, the sucker.
Well, if you find that you’re tempted to YOLO your life’s savings into the next meme stock, and willpower isn’t your strong suit, then you need something to distract your brain from convincing you that you are the next Warren Buffett Roaring Kitty.
Usually, distractions come in the form of blinking lights and loud dinging from the casinos of Vegas, but that won’t help you either.
What you need is something that you can obsess over that won’t break your bank.
Behold! I present to you the DistractoMatic! (TM will never arrive)
What I found when we first did our options investing bet on the COVID-19 pandemic was that I could not stop looking at how it was doing. I had all of the info loaded into Yahoo! Finance, and I looked at that sucker at least four times a day. When it immediately dropped 25% (timing, yo!), I looked at it 8 times a day. When it was up several hundred percent (#humblebrag), I looked at it like Gollum eyeing Precious.
Even though the amount that we put into the moonshot was small and the subsequent gains didn’t really move the needle, I was starting to succumb to apophenia, and began listening to that little voice inside my head telling me that I could probably start trading those options and really make some cheddar.
So, to prevent myself from giving into temptation to trade, I put a very small amount (relative to net worth) of money into Coinbase (#aff) and invested in a couple of crypto currencies (BTC and ETH for those playing along).
Now, I can obsess over crypto all day long, and if I day trade that grand into oblivion, so be it.
(ironic side note…I first wrote (disparagingly) about Bitcoin on August 9, 2013. Had I bought 10 Bitcoins (rouhgly $1,000) at that point, it would be worth roughly $580,000 now…sigh…)
The critical piece of having the very small shiny object to obsess over is that it distracts you from messing up your bigger game plan, which is investing wisely in the markets. ETH goes up by 10%? Woohoo! Have that dopamine rush. BTC drops 20%. Boo. Cry into your beer or coffee. You can get all of the thrills of trading in the markets and keep yourself distracted convincing yourself that you’re a mad trader without putting your real nest egg at risk.
In my mind, trying to time the market and actively trade is like gambling. It’s not investing. You don’t have some massive supercomputer and black fiber with a direct line to the stock exchange to beat the high frequency traders over the long term. Yes, the first to the trend traders on WallStreetBets may make a ton of money, but if you read the comments, there are a lot of people who followed the herd and got in on the trade too late.
So, by creating a tiny, tiny little fun gamboooooool fund to play the markets, you get to have fun and you get to distract yourself from gambling with the more important asset – what you’re saving to retire on.
Yes, I can tell you exactly what BTC and ETH have been doing every day for the past few weeks. I have no idea what’s happening with our nest egg.
And, to me, that’s the best possible outcome: fire and forget on the retirement fun and keep myself distracted with what I’d budget for a Vegas trip that I can’t take right now due to the pandemic.
How do you distract yourself, if you find that you need to, from going hog wild and overtrading your retirement funds? Let’s talk about it in the comments below!