Independent SEC-registered investment advisor at Stonnington Group, a wealth management and investment planning firm based in Pasadena, CA.
The recent GameStop short squeeze and skyrocketing popularity of “meme stocks” among millennial and even younger investors illustrates how popular and fashionable it has become to not only invest in the stock market but take the reins of your own investments. Social media platforms like TikTok are filled with advice for teenagers who seem more eager to learn about investing than any previous generation. Commission-free trading and investing platforms allow people to purchase fractional shares so nearly anyone can participate in the stock market, no matter how small their disposable income may be.
Despite economic downturns like the 2008 financial crisis, the average American’s wealth has increased over time, and people generally have more money to invest than they did just a few decades ago. The inability to go out and spend money on travel and entertainment during the ongoing pandemic combined with economic stimulus money creates further incentive to start investing now. Investing may be more popular than ever, but the big question is whether this is a short-term phenomenon that could be a market top or a long-term movement that could benefit all investors for years to come.
As an independent investment advisor who’s helped grow successful portfolios over the past several decades, I see several key factors indicating that the democratization and popularization of investing will drive long-term market growth.
SPAC Stocks And The Wealth Effect
Since the late 1990s, the number of publicly traded U.S. stocks and stock floatation has decreased due to buybacks, mergers and fewer companies going public. Despite this net reduction in the market’s total shares outstanding, stock prices continued to rise along with the value of the market, but a decline in new stocks correlated with a decline in interest and opportunity.
Recently, special purpose acquisition companies (SPACs) also known as “blank check companies” are creating a lot of new products and promising growth companies that are going public. With more stocks coming to market, there is more opportunity for people to buy, which generates interest in high growth companies that appeal especially to younger investors.
Furthermore, as asset prices rise, the ensuing “wealth effect” incentivizes people to spend more money, fueling even greater market gains. If this becomes a long-term secular trend, it will drive greater demand for increasingly limited assets or equities in stocks and real estate.
As SPACs create more opportunity, technology is making it easier for new investors to learn about capital markets so that it’s no longer just institutions that have the inside track on how to make money. Before now individuals investing for themselves simply bought funds, which are generally a good investment because they’re diversified and presumably managed by experts. However, now more investors are buying individual positions from their own knowledge and experience.
Similar to how commission-free digital trading platforms make it possible for anyone to start investing, digital “robo-advisors” using mathematical rules and algorithms are democratizing low-cost financial advice for fund investors. Other companies offer affordable, scalable advice as a service from a network of on-demand financial advisors so that no matter who you are or where you are on your investment journey, there is guidance at your disposal.
The growing strength of individual investors doesn’t mean you should go it alone, however. It’s very rare to find someone who, even with knowledge and experience, manages their own portfolio well, particularly when it comes to individual securities. Ultimately, when your investment account is large enough, it’s a good idea to work with a professional advisor who can help you put a long-term strategy together, select and manage individual securities and, most importantly, protect you from being too ad hoc and emotional about your investments.
What does all of this mean for new and experienced investors?
As SPACs create more opportunity to invest in growth stocks and strategies like crowdfunding make private equity more accessible, this will incite even greater demand and increase liquidity so that it becomes even easier to buy and sell, driving higher prices along with better information and increased sophistication.
Ultimately, the stock market is an auction market, which requires more buyers than sellers and more demand than supply for investors to be successful. Factors like the wealth effect and continuing democratization mean there are more people with more money buying more over a longer period of time, which in turn could very well fuel a long-term demand for stocks. Whether investing in stocks remains popular or not, the way to make money in the stock market – owning stocks for the long term – remains the same.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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Independent SEC-registered investment advisor at Stonnington Group, a wealth management and investment planning firm based in Pasadena, CA. Read Nick Stonnington’s full