Welcome to February. From a new president in Washington to GameStop’s reddit-fuelled rally, there hasn’t been a dull moment for markets in 2021. Read on to see what happened last month, how investments are performing and what lessons can be learned from investing in buzzy stocks.
So, what happened in the markets last month?
- Markets reacted positively to Joe Biden officially becoming the 46th President of the United States despite the violence seen in the US capital the week before the inauguration.
- The European Commission accused vaccine-producer AstraZeneca of not being able to fulfil its original contract of 300 million doses by March.
- Big tech companies reported better-than-expected quarterly earnings. Apple and Facebook both posted record revenue and profit while Tesla reported its first year as a profitable business.
- GameStop became the phenomenon no one saw coming after a group of retail investors pushed the company’s stock price to a high of $483, or about a 18x price increase, in a matter of two weeks in what’s known as a short squeeze (learn more here).
And how are investments performing?
Markets continued to rally in the new year with global indexes enjoying record highs thanks to anticipation around vaccine rollouts and economic recovery. China’s stock market reached its highest levels since the 2008 financial crisis and the UK’s FTSE 100 had the best start to the year on record , building off of momentum from December’s Brexit trade deal.
Performance dipped towards the end of January as investors started to weigh the challenges facing governments globally in vaccinating entire populations. The countries delivering the fastest mass inoculation efforts, including Israel and the United Arab Emirates, enjoyed strong market gains.
Lastly, given all the buzz around Gamestop, what does all this mean for me and my money?
We always encourage clients to drown out the day-to-day noise of the markets but that may have seemed impossible last week if you were following the GameStop (GME) story. Whether you jumped on the band wagon, or watched from the sidelines, there are a couple of things to keep in mind when thinking about buying individual stocks.
Trading individual stocks is risky. Risk is fine, but the amount of risk depends on your financial situation. Before you trade, think about how much you’d be willing to lose. GME was trading between $10 and $20 until recently, then the price rose to over $400 without anything fundamental about the company changing. One way to think about whether to buy a stock like GME is to ask yourself if you'd be ok to lose the majority of that investment if the stock went back to its previous price. Many people made a profit but others, who bought above the $400 mark, may have lost around 75% of their money in a matter of days.
FOMO isn’t a great reason to trade. People who make decisions based on emotion, like the fear of missing out on a “hot stock”, tend to lose money. Emotions make us make mistakes — like selling when stocks are cheap, and buying when they’re expensive.
Our take? Diversification is the best way to earn more return for your risk. Data shows that people who invest using a diversified portfolio tend to do better over the long run than investors who bet on individual stocks. It’s not as fun to talk about on reddit, but it works.
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