Chasing Winning Stock Picks? Consider This!
by Joshua Paulus - Cobalt Wealth Management
In this volatile - COVID News Influenced - financial market, we have seen an uptick in individuals talking about stock picks. These individuals are looking to take advantage of a depressed market to "strike it rich" by picking a winning stock. We have all heard the same old story of a friend's neighbor's cousin, who hit on a stock and made a boatload of money. Due to these and other stories, many individuals scramble to jump on board to replicate the success. A significant concern with this strategy is that it does happen…occasionally. So, it is tempting to think that you can find that one stock that nobody else is looking at and outsmart the market with a timely stock pick. Although this is an exciting strategy, it is, in all respect, merely gambling.
Gambling on pot stocks, digital currency, or oil and gas investment scams is not how you want to go about investing your serious retirement savings. Having some cash on the side that you wouldn't miss if you lost it...all of it, is useful to have on hand to alleviate this urge to gamble serious money in the stock market.
Picking a "hot-stock" is a random event and should not be confused with technique or strategy. Over the years, we have watched VIX traders, Ethereum, Bitcoin, IPO's, Gold, Oil, and other speculative traders consistently lose money trying to "time the market." Of course, most individuals don't talk about how much money they have lost on these speculative trades but love to talk up the one or two big moves they made off of a tip that they received from their stock guy.
Source: Factsongambling.com, Hacks, Facts & Myths, 2020.
The probability of a stock going up or down on any given day is nearly 50%, similar to a coin flip. A study of next day S&P returns after 3 consecutive "up days" demonstrates that the odds of a movement either way is nearly even.
Source: Vance Harwood, The Stock Market and the Gamblers Fallacy, 2013
So, in volatile markets, as in all markets, you should have a plan. A long-term, boring, strategic plan that you have developed through careful thought, research and analysis, or through the guidance of a professional financial advisor. The important thing is not to act impulsively and maintain the understanding that you devised a plan with these market conditions in mind. Financial planning is a process, and part of a solid financial plan is building out a strategic portfolio. Investment portfolios that are made up of a diversified mix of stocks, bonds, mutual funds, ETF's, and other investments are devised to manage risk and are tailored to individual investor's needs. It is best not to "roll the dice" on your retirement savings.
