With an increasing number of retail investors entering markets now that the coronavirus pandemic has stymied sports betting and made commissions low cost or non-existent on stocks, Jay Clayton, chairman of the Securities and Exchange Commission, warned Wednesday about the risks of tapping 401(k) retirement money and using it for riskier investments during this period.
As part of the CARES Act, Congress has permitted people withdraw up to $100,000 from their 401(k) or IRA accounts this year without having to pay the typical 10% penalty for people under the age of 59½. The decision was instituted to assist people in managing the economic effects of the coronavirus pandemic, which Clayton told explained he “very much” agrees with.
However, in unprecedented times of panic, when people are scrambling to do anything to make ends meet, investors have shown the tendency to take on more risk, or make less prudent investment choices.
People who take advantage of the penalty-free withdrawal will still have to pay taxes on the money, but those taxes can be paid over a three-year period.
“What I’m saying to the financial community is, ‘Look, people need to make those withdrawals to get over a difficult time, we should help them with that. But we shouldn’t use that lack of a penalty to put them into investments that aren’t appropriate for them,’” Clayton added.
Clayton’s agency regulates securities in the U.S., striving to encourage efficient market functioning and protect investors, according to its website.
While the pandemic has served as a chance for new people, notably millennials, to start investing in stocks, which Clayton said is a great way to build the financial stability that is so critical during times of economic duress such as the Covid-19 crisis, he said new retail investors should also be aware of the risks associated with equity markets.
“Our favorite kind of retail investor is your long-term retail investor who builds their wealth over time through investing. There is risk in being a short-term, market-timing participant, and it does make me nervous,” he said. “People are perfectly able to do it. We let them do it. But just remember, there is a risk in short-term market movements.”
This type of risk has become more sensationalized with the rise of sports betting transplants to the market such as Barstool Sports founder David Portnoy, who recently claimed he is better than Warren Buffett at trading, just prior to the market tanking over the last week.
Online brokerages have witnessed a burgeoning of new accounts this year, with retail outlets E-Trade, TD Ameritrade, Charles Schwab, and Interactive Brokers executing as many trades in March and April as in the whole first half of last year, according to public disclosures.
Marc Rubinstein, the author of the newsletter Net Interest, notes the explosion in Robinhood accounts and its correlation with millennials who enjoy sports betting.
According to Rubinstein, “43% of North American men aged 25-34 who watch sports also bet on sports at least once per week, and that’s the same group that has flocked to Robinhood.”
“On the basis that their customers love sports betting, there’s something meta about DraftKings itself having worked its way into more Robinhood portfolios than practically any other stock over the past month,” he added.
Investors looking to put capital to work using ETFs could consider the SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY), and the Invesco QQQ Trust (QQQ), which track the underlying benchmarks and offer low expense ratios and fees.
For more market trends, visit ETF Trends.