The Peril of Investment Fads
As we are midway through the year, it can be a good idea to take stock of what happened so far, and what we can learn about it. Looking back is an important activity as we seek to progress. It’s not about beating ourselves up for mistakes or feeding our ego for profitable decisions; it’s about learning and improving our thought/decision-making process to avoid the peril of investment fads.
The Fads of 2021
There are two dominant fads this year: “investments” in what are known as meme stocks and cryptocurrencies. Significant movements in both types of assets were driven by headlines and social media posts, not by fundamental changes in the businesses.
The primary force behind the making of a fad is hype. This is one way to discern the wisdom of an investment. Positive hype often drives prices significantly higher and fuels overconfidence for “investors”. The lack of positive hype can deflate an asset and cause “investors” to dig in even deeper with their speculative convictions. Hype initiates a fad; our emotions keep the fad going.
“Investing” in a fad is not really investing, it is speculating. This is because price movement is driven more by what someone says or how a group of people feel than the underlying value or business the asset represents. Such stimuli are highly sensitive and may change radically on a daily basis without any foundation.
Fads can make or lose you a lot of money. A fad can be a fun and exciting way to “invest”. But beware, such excitement may be short lived. And the cost of the powerful, yet temporary, excitement may be significant.
Expect to see more fads. There will be things that appear to work better than your strategy. There will be talks of “this time is different” and “paradigm shifts” to rationalize opinions and investment decisions.
The ultimate question is whether you want your portfolio to be exciting and hip, or whether you want it to be enduring. We suggest the latter.
Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.
By Anthony C. Williams, CWS, ChFC, MRFC, CLU | Investment Advisor Representative | President and Founder of Mosaic Financial Associates & Orthopaedist Advisory Group | Securities and advisory services offered through Cetera Advisors LLC, Member FINRA/SIPC, a broker/dealer and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.
©2022 The Behavioral Finance Network. Used with permission.