A volatile tech market

Good afternoon, everyone.

In today’s newsletter:

— Leah Golob

Tech stocks had a brutal week. Investors were in for a scare last week, and it all happened before Halloween. The tech-heavy Nasdaq took a beating as a selloff erased about US$2 trillion in market value in October, including nearly US$1 trillion in just the final week. Investors got spooked after several tech earnings reports revealed just how much money is funnelling into AI without a clear payout in sight.  Google parent Alphabet lost US$475 billion in market value, the second biggest one-day loss ever for a U.S.-listed company, according to Yahoo Finance, while Intel’s stock plummeted 28.58 per cent, reportedly its worst day in 50 years. They have bounced back a bit today, but more volatility is expected this week.

October’s rate hike could just be the start. As expected, the Bank of Canada bumped up its benchmark interest rate for the first time in more than three years on Wednesday as the country battles rising cost pressures. The central bank’s policy rate is now 2.5 per cent after a quarter-point increase. Governor Tiff Macklem argued that the hike was necessary to prevent surging energy prices from spilling over into the cost of other goods and services. Economists at Servus Credit Union and RBC expect more hikes, with RBC forecasting three more increases. The U.S. Federal Reserve, on the other hand, decided to hit pause this time around after raising rates in September.

Crypto exchange Binance just experienced the largest crypto hack on record. The FBI has confirmed that a North Korea-affiliated hacking group called TraderTraitor made off with US$6.3 billion in digital coins. As of Sunday, the crypto exchange said it had replaced 90 per cent of the stolen assets, but the remaining tokens are less liquid and will take longer to buy. Binance co-CEO Richard Teng has been adamant that users won't be left with financial fallout from the hack, but according to The New York Times, there appears to be no U.S. governmental or regulatory entity that could force Binance or another hacked crypto exchange to reimburse customers. Hopefully Binance does the right thing, but for now, customers are relying on “trust me, bro.”

Canada’s next federal budget arrives Thursday. This will be Prime Minister Mark Carney’s second budget and is expected to include new affordability measures, business tax incentives and investments in infrastructure, defence and culture, CBC News reports. According to a government source, the budget acknowledges that many vulnerable Canadians need immediate and medium-term support to navigate “this very uncertain time.” How much the government can reasonably spend remains an ongoing debate. Conservative Leader Pierre Poilievre has blamed government deficits for the country’s inflation, but an economist at Desjardins says those deficits have a “trivial impact.”

Prepare to never stop working. “The standard career, with its three tidy acts of education, work and retirement, is over,” The Wall Street Journal reports. Instead, many people may have to navigate a 60-year career stretching from their early 20s into their late 70s or 80s. While working into one's golden years is more common among educated, higher-income earners, Americans are now living nearly a decade longer than previous generations, and many will have to figure out how to stretch their savings. Experts suggest those in their 20s and 30s explore new learning opportunities, those in their 40s and 50s actively reskill and those in their later careers embrace new technology.

Prepared by Peak Money editorial staff

Samer Nusier, Vice President of Product & Strategy at RBC Direct Investing, talks about why investors seem to be drawn to increasingly risky products, why prediction markets should be regulated as gambling products, and how people should think about the difference between investments and gambling.

It seems like retail investors (at least some) have a growing appetite for higher risk, speculative products. Why do you think this is? 

Two key themes are at play here. First, the retail investor has fundamentally changed over the past five to seven years. We're seeing younger people investing earlier, with smaller amounts, and often directly rather than through an advisor. This is largely positive, as time is one of the most important factors in building wealth. But it comes with a trade-off. This new wave of DIY investors came up in a different information era – one shaped by social media and online hype – and it tends to nudge them toward riskier, more speculative products over your traditional portfolio. And too often, without fully considering what that could mean for their money.

Second, the industry has mobilized to monetize this trend. Some of it’s genuinely positive, like lower-cost investment options. Some problematic, like platforms that encourage frequent, speculative trading. And some predatory, think online "learn to trade" courses that promise outsized returns.

Layer in social media amplifying FOMO, and you can end up with a good chunk of retail investors pursuing speculative products and get-rich-quick schemes. The result is a meaningful shift toward higher-risk trading, often dressed up in the language of innovation and democratization.

Do you see things like prediction markets as outright gambling, or do you think they are different and something that financial institutions should be dipping their toe into, as we have seen in at least one case in Canada? 

These are gambling products, packaged as "derivatives" to stretch the definition of what counts as an investment. Thankfully, Canadian regulators seem to have largely recognized that, drawing a clear line by keeping sports and entertainment contracts out of securities regulation. 

Prediction markets are built on the theory of the "wisdom of the crowd" – the idea that a group of reasonably informed people will make a better collective estimate than any individual. The theory has some merit, but the products marketed as prediction markets are riddled with problems in how they try to derive those collective estimates.

More important than the technical limitations is this distinction: a real investment puts your money toward something productive – a business, a service or something that creates value – with the expectation of earning a return. Derivatives were originally designed over top of investments to manage risk through hedging. But we’ve seen prediction markets in the U.S. generating the vast majority of their revenue from betting on sports and entertainment. What risk is managed by wagering on whether Connor McDavid scores two or more goals against Florida? None. It's betting, plain and simple.

How should investors distinguish between these products, especially when they come packaged in very similar ways as standard, every day investments? What is the right way to determine the appropriate level of risk for an average investor, and then filter out products accordingly? 

The first and most important step is to understand your own risk appetite. Ask yourself two things: When do you need this money? How much of a drop in value can you stomach? If you need it soon to buy a home, pay for schooling, or retire – avoid high risk, because you'll have less time to recover if the value of your investments drops. And if the thought of a sudden 30 per cent drop makes you lose sleep, stay away from products with that much volatility.

Once you know your risk tolerance, judge products against it. If you don't understand the risk you're taking, don't buy the product. You don't need to be an expert, but your decision should feel like a balanced, thoughtful decision – not a guess.

Finally, some red flags. If it sounds too good to be true – it probably is. If it promises a quick, win-or-lose outcome, it's gambling. If you feel like you should be adjusting your positions all the time, your money is working for someone else – not you.

Good investments should generally increase in value gradually over time. There will be pullbacks, company-specific events, and they won't always go up, but over a long enough period your overall portfolio should produce a relatively predictable return. It’s ok for your investments to be boring – if you have a lot of anxiety about your investments, or a thrill from trading, you just might be gambling, not investing. The Wolf of Wall Street made for a great movie. But I’d say it's not a great model for your retirement.

This Q&A has been edited for clarity and length. Read the full Q&A on our website.