As a financial advisor, we always talk to clients about the relationship between risk and return. I’ve even written about it and again and again. When you invest in funds, you don’t see the rise and fall of individual stocks and it can be of little interest. That’s because investing should be boring.
Now you can set up an investment account and start trading very quickly. It takes 1 minute to set up an investment account with Revolut. I can then follow trending stocks on Reddit and away I go. Investing has become a form of entertainment, just like they want it to be.
When Covid struck in early 2020, people had to work/ stay at home. Sports were all suspended and people had nothing to bet on. But the stock market doesn’t close that easily and investing on stocks became a new pastime for many who hadn’t given them a second thought before. A fortune could be made pretty quickly.
And what better than investing in companies that benefited from Coivd. With people working from home, all meetings had to be held remotely and Zoom was positioned perfectly to facilitate this. Despite competition from free online meetings apps such as Microsoft Teams and Google Meet, Zoom saw its share price grow by 532% in just 8 months in 2020.
Another company to benefit from Covid is Peleton. Gyms were closed and no one knew when they would reopen. Peleton had the technology and hardware for people to be able to continue with the popular spin classes in their own home. Their share price rose by 609% in 10 months in 2020.
If a company does not make a profit, the market will turn on them eventually, after the euphoria has worn on. Markets are efficient and companies go back to what their true value is based on available information. Add in high inflation and the Fed signaling a hike in interest rates. The low rates that these companies could borrow at will not be so low very soon. We saw a big drop in share price.
What is Zoom valued at today? $139, a fall of -75% since it hit its peak in October 2020. Peleton is at $32, a fall of -80% since its peak in December 2020.
Another favourite, Robinhood, the company that facilitates all this stock buying. It’s share price is down -75% since its peak in August 2021.
These are extreme examples of risk and return. But it is a real example of what can happen.
If you want to reduce those wild falls, you invest in more than one stock. The MSCI World Index has c. 1,600 different companies. If you want to reduce it even further, you invest in other assets classes such as bonds and commodities. But if you do so, you won’t get the 532% growth when times are good either.
You need to decide what you want over the long term.
21 February 2022