Money: A 'Rude Awakening' Is Coming for Millions of New Investors

Article by Mallika Mitra in Money

Americans fell in love with trading stocks during the pandemic, pouring billions of dollars into a market that only ever seemed to go up. Now with the Federal Reserve set to start hiking interest rates, experts say making money buying and selling shares is about to get a lot harder. Many novice traders will never know what hit them.

In the past few years, investing has become something of a national hobby. Once the province of Wall Street traders, or at least well-heeled professionals with 401(k)s, stock trading captured the public's imagination with help from apps like Robinhood. Before long, students started sharing their trading tips between classes and people couldn't stop talking about cryptocurrency, even on dating apps.

Some estimates say the retail crowd’s share of the overall market more than doubled in 2020, and the numbers kept climbing from there. But the investing boom can't go on forever. And Federal Reserve Chair Jerome Powell has indicated that the central bank will raise interest rates, possibly as soon as March. The move, designed to curtail the amount of money coursing through the economy, could mean fewer dollars chasing the kind of speculative assets that have seen huge price increases in recent years, such as tech stocks and cryptocurrencies.

"Many new investors will be in for a rude awakening," says James Angel, a finance professor at Georgetown University. "The stock market is not a one-way upward escalator."

It felt almost effortless to make money on risky investments like meme stocks, cryptocurrency and the high-flying tech sector in recent years. But now that easy money is behind us, newer investors will face a challenge: Can they be patient, and turn their fast-moving hobby into a way to build long-term wealth?

Risk was rewarded

America's investing obsession started even before the pandemic, kicked off by a financial innovation: zero-commission stock trades. Popularized by the investing app Robinhood, in 2019 brand-name brokerages like Fidelity and Charles Schwab jumped on the bandwagon, helping to bring trading individual stocks into the mainstream.

Then, the pandemic hit. Confined to their homes during lockdowns, Americans were looking for a new hobby, from high schoolers trying to replace after-school activities to sports gamblers hoping to fill a void. People with little or no experience with investing took to social media to learn how to get in on the action. Many of them had extra cash in the form of stimulus checks from the government: Nearly half of respondents to a Betterment survey say they invested some of their stimulus money.

"Last year was a year where risk-taking was rewarded," says Jack Ablin, chief investment officer and founding partner at Cresset Capital. "The farther out you went on a limb, the better your investment results were.”

But now, he says, we're seeing a reversal of that.

Some investors may get burned

The stock rally had to end some time, and there are already signs the music is beginning to stop. Financial markets have had it rough in 2022, with the S&P 500 posting its worst .......

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