“FOMO and HODL are not investment strategies,” says Charles Schwabb, UK boss
British boss of US stock brokerage giant Charles Schwab (SCHW) has warned new retail investors that many are at risk of “life-changing” losses due to “naive investment decisions”.
Richard Flynn, managing director of Charles Schwab UK, told Yahoo Finance UK that many of these new entrants to the stock market have a poor understanding of how to approach risk management.
“This is a key area of retail investing that is likely under-sold, how important risk management is, especially in markets like this where there is uncertainty, it can there will be rapid volatility, ”Flynn said.
“What’s really important to us as a business is educating clients and helping them understand that things like high inflation will impact their portfolios.
“I think it’s up to everyone in our industry to do this because the consequences for new investors of making not entirely uninformed decisions, but perhaps naive investment decisions, can be really significant. and change life. “
Millions of amateur investors went public for the first time in the past year. Many have flocked to the Reddit r / WallStreetBets forum to share investing ideas and stock advice. In January, forum members successfully coordinated a buying blitz that spiked the stock price of retailer GameStop (GME) and forced short sellers to drop their bets against the company.
Read more: Amateur investors seek profits during pandemic
The same group of traders have since moved on to other companies including the movie theater chain AMC (AMC) and the old-fashioned phone makers BlackBerry (BB) and Nokia (NOK), often pushing stock prices to low. levels that baffle analysts and traditional investors. These companies have been nicknamed “memes stocks” because of the importance of social media to their stock prices.
“We’ve had millions of customers asking us about the actions of memes,” Flynn said. “We come back to this key direction: FOMO and HODL are not investment strategies.”
FOMO – fear of running out – and HODL – hold on for life – are part of the new lexicon developed by stock traders even on r / WallStreetBets. Neither strategy has much to say about risk management.
Robinhood (HOOD), a mobile brokerage firm closely associated with the WallStreetBets movement, went public this week in New York City. Thursday’s $ 32bn (£ 23bn) IPO capped off an 18-month explosive for Robinhood, which was only founded in 2013. Funded accounts rose 143% per year. last year and revenues increased 245%.
Robinhood and other investment platforms have benefited from a boom in retail investment around the world since the start of the COVID-19 pandemic.
Flynn said Schwab has seen “huge volumes of new clients, new people coming to invest for the first time in recent years.”
Britain is Schwab’s largest country outside of the United States, although the company does not release specific numbers. Data released this week showed that the UK’s 10 most invested apps have gained around 1.6 million new users since March 2020.
Experts attributed the increase in amateur investment to excess savings accumulated during the pandemic, investment opportunities presented by market shocks and boredom, with millions of people stuck at home during lockdowns.
Read more: Low savings rates push Britons to seek returns
The boom has raised concerns among some lawmakers and activists who fear that new platforms like Robinhood will encourage people to take irresponsible risks in search of profit. Robinhood offers high risk products, a gamified app, and does not charge any commissions, encouraging people to trade regularly.
In one high-profile case, 20-year-old American Alex Kearns died of apparent suicide after racking up what he believed to be $ 750,000 in losses trading complex options on Robinhood. In a note left with his family, he said he had “no idea what I was doing,” according to the Financial Times. Robinhood has since committed to reforming its risk controls and better informing its customers.
Flynn said Schwab has strict controls over the use of options by retail investors. He did not mention Robinhood or the Kearns affair, but spoke generally of the options: “We urge all retail brokers to remember their own responsibilities.”
Look: Senator says Robinhood has “no economic interest in creating value for customers”