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 and decision-making process.

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. 

Hype is the primary force behind the making of a fad. 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.

Buyer Beware

“Investing” in a fad is not real 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 daily 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. 

Looking Forward

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. I suggest the latter.

 

 

 

 

 

©2021 The Behavioral Finance Network. Used with permission