Desperate Investors Embrace Risky Moves

The other day, I wrote about economist Nouriel Roubini and the on-going stock market rally. I opined that I thought the rally was the result of investors putting aside worries about risk and making short-term investments in the stock market because its one of the few investments out there that offers the prospect of any kind of considerable returns. My overall point was that, because of this fact, the stock market should not be taken as an accurate gauge of the U.S.'s economic health. Furthermore, we're likely to see considerable volatility in the markets because of this phenomenon.

It turns out that the Los Angeles Times has published an article that pretty much directly echoes everything I said. You can read the article here.

I won't paste the whole article, but here are some important excerpts to give you an idea of what I'm talking about.

First, the opening paragraphs:

Stung by punishing losses in the bear market, some individual investors are souring on traditional buy-and-hold investing in favor of aggressive trading aimed at scoring big gains. ¶ Trading at online brokerages has soared in recent months as investors have tried to capitalize on rising securities markets. But individual investors increasingly are embracing strategies that carry outsized risks. ¶ In some cases, for example, investors have ventured into a relatively new type of investment product designed to magnify the movement of the underlying markets. That can sometimes yield big gains if investors bet correctly but bruising losses if they don't. ¶ To critics, the push into aggressive trading is the equivalent of doubling down at a casino to recoup earlier losses. ¶ "It would be a terrible tragedy if people try to recover from the devastation of the financial crisis by creating even more devastation in their personal investment accounts by taking on risks they don't understand and can't afford," said Barbara Roper, director of investor protection for the Consumer Federation of America.

The "relatively new type of investment product designed to magnify the movement of the underlying markets" that they're referring to are ETFs or Exchange-traded Funds. The article continues:

Susan York was fed up with the dismal performance of her 401(k) retirement account. Then her husband saw a Sunday morning infomercial in January touting the benefits of trading options, which give an investor the right to buy or sell stocks and other securities at pre-determined prices.

The 50-year-old from Naples, Fla., had limited investment knowledge but attended several seminars before starting to trade in May. So far, York said, she's up an average of 40% a month and is trading full time.

"It's the best job I've ever had, not just for the enjoyment but from the compensation standpoint," said York, who previously sold telecom equipment. "I've replaced a significant six-figure income."

Trading activity at online brokerages jumped in the second quarter as the stock market began rebounding in early March from its deep sell-off. Compared with a year earlier, activity was up 28% at E-Trade Financial Corp. and 36% at TD Ameritrade Holding Corp.

The article continues to state that apparently some ETFs are being sued by investors for being misleading. Overall, a pretty interesting article that makes a lot of things clearer. I think this article ultimately corroborates my assesment that the stock market is not an accurate measurement of the real American economy's health at the moment.