Planning for the future means finding a balance between risk inherent in the stock market and the security of having money there when you need it—for retirement, your child’s college education, or to support your family should something happen to you.
As the recent events around the rise and fall of GameStop stock show, feeling like you’re beating the odds in risky investments can be thrilling. But when the dust has settled, it can cost people a lot of money. While less exciting, the planned road can pay off in the long run.
The rise: GameStop investments go viral
First, what happened? Fundamentally speaking, people use the stock market to invest in a stock they think is going to do well. Of course, it gets a lot more complicated than that: you can also bet against a company’s stock if you think it is overvalued and trading at a higher rate than is sustainable given its financial circumstances.
This second kind of investing is known as a short sale because you have a limited amount of time in which to be proven right—and earn money. If you’re wrong, you can lose much of what you invested.
Given the pandemic, many Wall Street hedge funds and other top players have been using short sales over the last year to bet that certain brick-and-mortar companies are overvalued. But in January, users of a Reddit thread, r/WallStreetBets, and other forms of social media decided to challenge Wall Street by orchestrating a short squeeze.
A short squeeze occurs when investors buy a lot of a stock and push the price up—putting the short-sellers (people who have bet that the stock price will fall) at risk to lose a lot.
The movement may have started as a way to stick it to Wall Street insiders, but as the price of stocks in GameStop, a brick-and-mortar video game retailer, and a few other viral stocks rose, everyday investors got excited and invested too.
The fall: Robinhood and a bubble that finally burst
As the story and enthusiasm went viral, people seemed to be making fortunes. But then the bubble burst.
One of the online platforms that had spurred the movement with its allegedly commission-free trading for individual investors, Robinhood, blocked more buys of GameStop and other viral stock. A few other investment platforms made similar moves, and panicked investors began to sell.
While some individual investors profited and at least one Wall Street hedge fund landed on the losing end of the short squeeze, the vast majority of individual investors lost money.
The New York Times estimates a loss of roughly $30 billion in on-paper wealth. And a Yahoo Finance-Harris Poll determined that 28% of Americans invested in viral stocks in January 2021. The upshot? A lot of people lost money.
The hard lesson: plan for the unpredictable
So what does this have to do with estate planning? It’s all about risk management and long-term stability—and the value of having a team of experienced legal and financial professionals on your side. We are strong believers in being team players, and we work in conjunction with Financial Advisors, Planners, and CPAs.
While members of Congress on both sides of the aisle are calling for an investigation into why the Robinhood trading platform prevented further buys of GameStop and other viral stocks, we’ve just witnessed a painful reminder that the unexpected can happen. (For its part, Robinhood has stated that it was trying to limit market volatility.)
The specifics of the GameStop crash haven’t been seen before. But however you slice it, markets are unpredictable—and that tenet is fundamental to investing.
While many people interviewed in the aftermath have cited the high of investing in rising stocks as a reason why they went all in, that kind of excitement doesn’t make for a stable, long-term strategy. Trying to parse a lesson from these losses may seem like salt in the wound, but it would be even worse to not examine the situation and come up with a different plan for the next time.
When it comes to long-term financial planning, it helps to have a strategy and not try to do it all yourself. While maybe not as thrilling as investing in rapidly rising stock, estate planning is an effective approach to long-term financial management.
Don’t go it alone
When it comes to your future, only a certain amount of risk is acceptable. Don’t go it alone. Instead, we recommend talking with an attorney. Especially an attorney that works with your financial advisor! There are many different ways to create an estate plan and many different kinds of trusts to protect assets, including greatly appreciated assets. An experienced attorney can help you decide on an approach that best fits your needs—so that you can plan for a more secure financial future.
If you have questions about estate planning, contact us to schedule a consultation. An experienced attorney can guide you through the process.