Fall of the Mighty

A vague cultural phenomenon snapped into sharp focus for me recently at a restaurant opening in Manhattan. The revelers at Dylan were mostly twentysomethings and soooo trendy. They looked like a bunch of Gap models with cell phones pressed to their beautiful little ears. More on point, virtually all of them were chastened day traders. A young partner in the restaurant venture confided that the volatile NASDAQ had all but ruined him, prompting him to--oh no!--start a career.

Not that he'll stay away from trading for good--just until he can recapitalize.

If every generation has its vice, day trading is it for Generation X. Think of it as financial cocaine--pleasant highs, awful lows, disastrous in the long run. Gen Xers aren't the only ones abusing this drug. Far from it. But to them it's hip. The Gap kids lost tens of thousands each in the market's spring cleaning. But, hey, they're with it. They wear their losses as a badge of cool.

By that standard, the coolest dudes on Wall Street are famed hedge-fund manager George Soros and his chief lieutenant, Stanley Druckenmiller. Professional day traders, they got caught in the spring turmoil too--and compounded their losses by betting against the dollar, apparently in a futile attempt to make back what they had lost on plunging tech stocks. Last week Soros--best known for winning $1 billion in a bet against the British pound in 1992--publicly overhauled his firm, saying he would no longer take big risks. Druckenmiller, as chastened as those twenty-somethings, abruptly left the company.

The upheaval follows famous troubles at another suffering hedge fund, Julian Robertson's Tiger Management, which has shut down, and at Berkshire Hathaway, where Warren Buffett's poor performance of late has put the stock into a historic tailspin. Buffett, of course, is no day trader. But totting up the problems of some of the world's most revered investors can be instructive

The main point: markets are risky, and even pros lose their shirts. Soros' funds ran into trouble trying to trade their way out of a loss. Robertson bullheadedly stuck too long with a concentrated position in out-of-favor value stocks. Buffett, whose stock has been edging back, refused even small exposure to an important sector: technology.

If you're taking a pounding in the market, odds are you've made one of the same mistakes. Don't make things worse by trying to get even with a big bet. Don't give up and sell out, either. But do make adjustments. Boring as it seems, there just is no substitute for a diversified portfolio and a long-term view--with a little cash set aside in case the market really spills and you want to bargain hunt. At worst, day trading is pure gambling, and at best, it's an effort to time the market. Neither works for long.

The Schwab Center for Investment Research recently updated a classic study on timing to cover the past 20 years. Had you invested $2,000 at the market's lowest point in each of those years--perfect timing, which no one has--you would have accumulated $387,120. Yet had you simply invested the money the day you got it--an easy strategy--you would have done almost as well, ending up with $362,185. And had you divided the sum into 12 equal parts and invested once a month--dollar-cost averaging--you would have wound up with $352,450, at considerably less risk. Now, that's hip.

E-mail Dan at kadlec@time.com . See him on CNNfn Tuesday at 12:45 p.m. E.T.