Is your household’s financial history buried in today’s headlines?
There are a lot of financial worries right now, but two things that I think have been lost amid recent headlines are holding me back.
In a world where financial danger signs seem to be everywhere, it’s easy to ignore the warnings that affect us the most.
For proof, let’s dig in and under a few headlines, especially “Day Trader Army Loses All the Money It Made in Meme-Stock Era” and “US Household Debt Nears $16 Trillion, Due to Mortgage Action “.
It’s easy to read stories about these topics without internalizing how much they touch home.
The day-trader/meme-stock story, for example, was mostly about making fun of new/naïve investors, but no one should laugh.
Morgan Stanley’s trading team estimated that amateur investors are now exactly where they started in January 2020, according to a Bloomberg report. Stunning, attention-grabbing gains were wiped out as hot names that fueled the meme-stock investing craze slumped; AMC Entertainment — widely considered the top meme stock — has lost nearly 80% of its value since June 2021, while Peloton Interactive, a darling of 2020’s pandemic-themed investment, is down 90% of his record. Plus-side meme stocks are an endangered species.
Morgan Stanley based its calculation on trades made by new entrants since the start of 2020, using exchange and public price feed data to tally overall profits and losses. Millions of Americans began actively investing during the pandemic, stuck at home and with little else to spend money on. Newbies took to the hot names and bragged about how they were changing the game.
But market cycles don’t change much; they inevitably come and go.
And while it’s easy to watch those outsized gains and laugh at how quickly that money has come and gone for newbies, it’s not like seasoned investors should feel much better.
Indeed, the market has also wiped out most of the average investor’s gains since the start of 2020.
Investors who have stretched with a hot fund like ARK Innovation (ARKK) have already been in the red since 2020, but so have investors in BlackRock 60/40 Target Allocation, a conservative fund that is representative of what typical investors could do with a balanced portfolio. .
Look at your own holdings; If you track the value of your portfolio at the end of the year, chances are your balance is now close to or lower than it was at the start of the pandemic year. If the market moves slightly south from here, many mutual funds will soon see their three-year track records turn negative.
The missing message: Day traders may have made an investment strategy mistake, but you don’t have to be a stock market jockey to see account values shrink and years of gains wiped out right now .
The crucial point is that the recent decline does not make it foolish to stay the course with your more conservative and traditional investment choices.
Those same funds that see two years of gains erased have long-term records of gains and turning downturns into long-term profits.
Don’t confuse a struggling market with a bad investment decision. Successful long-term investors ride out downturns, continue to invest when markets are down, and experience periods when gains are wiped out. There’s no shame in that; it’s a normal part of the trip.
The credit and debt headlines this week also created a confusing picture.
The New York Fed’s quarterly report on household debt and credit was widely expected to show that Americans’ total credit card balances would hit record highs.
Instead, total household debt rose by $266 billion in the first quarter, after gaining $1.7 trillion since the end of 2019.
Mortgages in the hot housing market were cited as the main factor behind the increase.
Meanwhile, credit card balances were down in the first quarter, surprising experts by sticking to a traditional seasonal pattern after the holidays. Despite this quarterly drop, there was $71 billion more in credit card debt in the first quarter of this year than last.
The real story, however, is the trend of credit card spending since the pandemic subsided. Call it revenge spending or pent-up demand, but consumers went wild.
American Express customers spent more in March 2022 than any month on record, according to the company’s most recent report, with cardholder spending up 35% in the first quarter of this year compared to compared to 2021. Capital One reported a 26% year-over-year increase. increased purchase volume. The trend of increased spending is industry-wide.
The all-time high for revolving debt — which is mostly credit card debt — was set just before the pandemic began. Even with the decline reported this week, that record is expected to fall this year.
What people miss in these stories is that it couldn’t have happened at a worse time.
The rate hikes have already hit average credit card rates, according to Bankrate.com. Ted Rossman, senior industry analyst for the site, says it won’t take much longer for the Fed to push the average credit card rate from 16.4% today to a record high in 18 years.
In an interview on “Money Life with Chuck Jaffe,” Rossman noted that while consumers have weathered the effects of inflation well so far, it becomes more difficult when rising rates hit larger balances.
“Half of cardholders have debt, half of them have had it for at least a year,” Rossman said. “It becomes very persistent. … It’s hard to build wealth when you’re paying 15-20% to credit card companies every month.
Ultimately, the numbers suggest consumers are becoming overloaded. At the macro level, this can be explained; at the micro level – if it’s happening in your home – it’s unsettling.
With interest rates and borrowing costs rising, consumers need to pay attention to what their own statements are telling them.
The message they’re sending now is that credit card debt won’t be easier to pay off any time soon.