Investment Selection: Are Trendy Investments a Bad Idea?
Once upon a time, only a select few had the privilege of accessing most of the investments we have today. From 2000 until 2010, the Main Street investor had to work with a broker or financial advisor to buy their everyday blue-chip stocks. With the evolution of technology and the internet, investors can now open accounts, fund them, and trade within the hour from the convenience of their phones.
We’ve come a long way from checking daily stock prices on the radio or calling your broker to get the latest ticker reading. Today, you can check the price of a stock online in seconds and access the news cycle 24/7. We have platforms for every investment idea, both good and bad. For retail investors and the industry, this was a game-changer. But change can be costly.
A breeding generation of investors has grown up in a cult-like investing culture. This culture comes with a hunger to chase the next disruptive investment opportunity, and do-it-yourself (DIY) investors are all for it. Unfortunately for many, it’s easy to believe what you read on the internet. Although sometimes there may be good opportunities for you, the odds that your investments are aligned with your goals if you’re jumping from trend to trend are lower.
The book Manias, Panics, and Crashes by Charles P. Kindleberger and Robert Z. Aliber states, “The word ‘mania’ in the chapter title suggests a loss of touch with rationality, something close to mass hysteria. Economic history is replete with canal manias, railroad manias, joint-stock company manias, real estate manias, and stock price manias. Yet, economic theory is based on the assumption that men are rational. Since the rationality assumption that underlies economic theory does not appear to be consistent with these different manias, the two views must be reconciled.”
Let’s explore some examples of historic “manias.”
Trendy Investment Selection Over Time
Dot Com Bubble of 2001
At the dawn of the internet, the dot-com frenzy (backed by low-interest rates) led retail and institutional investors to pour capital into any dot-com company they could access.
It didn’t matter if the valuations were considerably low or wildly unrealistic. As a result, companies with no real business plan or legitimacy raised millions of dollars in funding from institutional and retail investors. But, of course, we all know how that ended.
Financial Crisis of 2008
Yes. Many factors between institutional irresponsibility and lack of government regulation/oversight contributed to the Financial Crisis of 2008.
However, a surge in financial innovations, particularly in the mortgage industry, led to another frenzy of increased investments becoming more and more complex, thus making it difficult to sort out quality investments from inflated junk.
Financial advisors and brokers allocated large concentrations of their clients’ savings into these instruments as they were achieving unbelievable returns. Unfortunately, as the mortgage industry collapsed, the stock market and US economy collapsed with it. As a result, the whole house of cards fell.
Comparing Economic Crises to Trendy Investments
We could go down an endless rabbit hole talking about these economic crises and the factors that drove them. We could also spend hours talking about the tremendous impact it had on Americans. But, of course, the whole story of these economic crises is far more complex and nuanced than the boiled-down versions I’ve recounted. Still, it’s hard to ignore the similarities between those market crashes and the trendy investments of today.
These crises serve as a reference to help make more conscientious decisions when investing. Trendy investments today might not be followed by an economic crisis, but that’s not a good enough reason to fall into an investment trend with no planning behind it.
Powerful trends can influence the stock market. We saw this with the GameStop short squeeze in January 2021. Today, the hot button topic is cryptocurrency and NFTs. The media often highlights those who participated in massive wins, and too often, those who suffered tremendous losses were left out of the limelight. This skewed narrative helped create a frenzy reminiscent of a modern-day internet-aged Gold Rush. Folks often forget that there is someone on each side of a trade, and if one party is winning, the other is losing. I want to clarify that I’m not making a call on the validity of these investments. Many speculators struck gold in the Gold Rush of 1880. Likewise, some of the world’s most successful companies were born during the dot-com bubble. However, an investor must ensure that they are not swept up into the ” mania ” frenzy.
If you’re investing in digital assets, ensure you’re not chasing a trend or a pipe-dream of accelerated returns.
5 Tips to Help you Avoid Falling For Investment Trends
1. Invest in what you understand.
You don’t have to be an expert or financial analyst, but your decision to invest your hard-earned money should be in something that you comprehend, even if only on a basic level.
If you can’t explain your investment and how it works to a family or friend confidently, it may not be for you. It’s never fun to suffer a loss in your investments. However, suffering a loss without knowing why hurts even worse.
2. Invest in something meaningful.
These markets are still in their infancy for the most part. As a result, there is a lot of noise out there, and it’s not difficult to find investments that are only performing due to the inertia of the trend.
If you’re going to invest, invest in something you believe in and not a fad. If you believe in the vision, you are more likely to hold on long term through the volatility and uncertainty.
If you only believe in the trend, the chances that a new one comes along in a few weeks are very high.
3. Invest in line with your risk appetite.
It’s no secret that the crypto and NFT markets are as volatile as investments come. Investors tend to pull their high-risk assets during times of uncertainty, first. Therefore, the crypto market typically suffers more significant swings in adverse market events.
When the markets are up, they are up big. But when they are down, they are down big, too. If you can barely stomach the ebbs and flow of the stock market. Think twice about entering digital asset classes.
4. Invest in line with your financial plan.
Deciding to invest in digital assets takes careful planning and strategy. It’s essential to know how much of your overall portfolio could be allocated to these investments without jeopardizing your confidence in your long-term financial success.
At the end of the day, a financial plan gives you peace of mind that you’re as on track as possible to meet your life goals and those of your family.
If you don’t have a financial plan. I strongly recommend you to connect with one, today. Your investment strategy should align with your personal and long-term financial goals. Plain and simple.
5. Invest in the boring.
At the end of the day, you’re good ol’ fashioned stocks and bonds have a proven track record of helping everyday people achieve their financial goals. Stocks are tied to the value of a company and its ability to generate revenue now and into the future. Between innovation and inflation, we can lay our hat on the fact that stocks will appreciate over the long term. It’s measurable. Cryptocurrency and NFTs are more speculative today. Atypical factors can affect the price of these assets, making them difficult to forecast over the long term (please refer to Elon Musk’s SNL appearance).
If you’re investing in cryptocurrency, NFTs, or another alternative asset, do so with care and attention. Please ensure that your financial goals are clear and you completely understand the downside risk. Digital asset classes are still struggling with a lack of regulation and oversight. It is still a mystery what the long-term tax implications will be when these investments become more and more mainstream.
The Bottom Line of Trendy Investment Selection
If you don’t understand what you’re invested in, you need to work with a planner who can break down complex concepts to a level that makes you feel comfortable with your investments and overall financial plan. A financial planner will be able to guide you in determining what to invest in and how much to invest. And most importantly, a financial planner will help you stay on track as you work towards achieving your financial goals.
Be cautious of self-proclaimed gurus in this space. Please remember, when you see or hear about someone winning big in any investment, that typically means the opportunity is already gone. Don’t chase the trend. Chase your goals.
Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.