Holiday weekends are a time when old friends and family gather for food, fellowship, and in my case, casual discussions about the stock market. Easter this year was more of the same, with smaller crowds and one notable exception. Everyone is suddenly an investment expert.
Free trading platforms, combined with a historic bull market run, have created a new class of investor. These “Robinhood Experts” made a lot of money in 2020, but so did everyone else. The S&P 500 gained 15.76% last year, 17.88% if you factor in dividend reinvestment.
Add those numbers to a Bitcoin gain of over 300% for the year, zero percent interest rates from the Fed to keep bond yields down, and millions of people out of work staring at their computer screens. It was a perfect storm for the novice to enter the investment world.
Expertise is Earned when Market Conditions Change
Robinhood added three million new subscribers in 2020. A feeling of abandonment by their government during a pandemic was fueled by the narcotic allure of unprecedented profits. I’m a huge fan of the democratization of finance, but there is a downside to all of this.
Everyone made money. That’s the downside. You can’t declare yourself an expert when market conditions are that favorable. It was almost impossible to make a bad investment decision in 2020. After the crash in March, the only way to go was up.
It’s 2021 now and reality is beginning to set in. My “expert” friends over the weekend were all in a quandary. Why were their portfolios losing money? It’s pretty simple, really. The sands have shifted. You need real knowledge to make sound investments now.
Don’t get me wrong. There’s nothing more valuable than experience and I’m happy that all these folks are actively trading. My hope at this point is that the newbies start educating themselves on how the market normally works. Last year was an anomaly.
Media Stories are Not a Reason to Sell
On March 4th, Fed Chairman Jerome Powell sent the stock market into a tailspin when he declared that we were “a long way from our goals of maximum employment and inflation averaging 2% over time.” All major indices went down over 1% that afternoon.
Powell’s brief statement caused bond yields to rise and equities to fall almost immediately. As a newly minted “expert” on Robinhood, you may have dumped your stocks and bought bonds. That’s certainly your prerogative, but definitely not my strategy.
Selling your shares short and taking a loss is almost always a mistake. Sure, I do it for tax loss harvesting, but that’s motivated by own personal timeline, not by a media story or stock promoter. Buy low. Sell high. That’s how you make money in the stock market.
As for bonds, I still think they’re a waste of money, especially in the current environment. The government is printing money to cover stimulus payouts. Inflation is inevitable. Those “high” yields aren’t enough to cover your losses in bond values over the next few years.
Building a Winning Portfolio on Robinhood
For those new to self-directed investing, I’d recommend starting your portfolio by buying FAANG stocks: Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOG). Their compounded annual growth rate from 2010 to 2020 was 25.3%.
Next, buy Bitcoin (BTC). Lots of it. They closed under $56K on Wednesday and I expect a big jump after April 15th. Some experts believe it could break $100K by years end. With mainstream adoption by Paypal (PYPL) and a pending Bitcoin ETF from Fidelity, I’m betting on it to happen.
Personally, I match every stock purchase with an equal purchase of Bitcoin. My portfolio is 50/50 between equities and cryptocurrency. Bitcoin returns were over 300% last year. Nasdaq, which is where my tech stocks reside, posted a 42.58% return.
I don’t strictly buy FAANG stocks and crypto. Tesla (TSLA) was pretty good to me last year, despite my “expert” opinion that they would fade. I was also pleasantly surprised by a Chinese EV company called NIO (NIO). I bought them at $4 in 2020 and just sold them for $62.
Build Your Base and Then Get Creative
Investing in blue chip dividend stocks like Nike (NKE) and Mastercard (MA) might not be sexy, but it’s necessary to build a solid foundation for your portfolio. Add these to the five FAANG stocks, Paypal, Tesla, and Bitcoin. That’s a solid eight proven winners to get started.
NIO is already played out, so don’t bother, but don’t be afraid to check the OTC market for pink sheet stocks that could be big hitters. You can’t buy them on Robinhood, but you can pick them up on E-trade. They’re short money, so think of them as more of a lottery play.
Watch for fresh listings on Nasdaq and the S&P. Companies that are new to these indexes, particularly microcaps and small caps, have a huge upside. I watch for those and I pay attention to new legislation that affects specific industries, like the energy market.
Finally, review the S&P’s eleven market sectors and find an investment in each that feels comfortable for you. It doesn’t have to be a specific company. I use sector ETFs because it minimizes my downside volatility. My returns on those average roughly 8% per year
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