Speculation is really the most dangerous when it is the easiest
I have often cautioned investors about investing in stocks and bonds directly or in new investments which may not have adequate performance data. Investors were not ready to believe that these investments come with high risk or that anything could go wrong in them. I am reminded of Issac Newton’s quote “ what we know is a drop, what we don’t’ know is an ocean.”
With investors not being sure of equity markets and debt funds giving low returns due to rising interest rates, investors are looking out for that “one” investment which will give them good returns. If it was cryptocurrency last year, it is non-convertible debentures/ P2P this year.
Complex instruments made simple lure investors by the droves. Stock baskets, crypto, NFT, international stocks, etc – all investments made easy to invest with the click of a button but hardly understood by individuals. Many do not even understand the taxation on them.
Speculation is really the most dangerous when it is the easiest.
This ease is also getting people to believe that they are invincible. In my sessions, I find participants who are not willing to accept that P2P is very risky or the security on any bond is not easy to liquidate. It is sad that investors wait for a negative event to realise their folly and tend to blame everyone around including regulators for not warning them.
Investors are sometimes their worst enemy themselves. Being overconfident means underestimating risk. Moreover, investors form opinions based on data that may not be meaningful.
Here is what investors need to do to become better at identifying investment options and not letting emotions make investing decisions counterproductive.
1) Stop asking what is the best way to handle current markets or investment to be made “now”. Predicting markets is impossible and constantly changing one’s portfolio based on macroeconomic factors is also not a viable portfolio strategy. How would any individual know the market peak or bottom and or be able to keep moving from debt to equity regularly based on interest rates?
2) Stop asking what is the “best investment”. No fund manager can consistently beat the market. The most skillful fund managers across the world have had cycles of underperformance. Buy funds with good long term track records to avoid being trapped into jumping into recent performers, who may have already given great returns and may not give the same stellar performance going forward.
3) Stop looking at others investment stories. The noise all around about new strategies or enticing trades is exactly just that – noise. Embrace the “Joy of missing out”. It may make you feel incompetent but better safe than sorry.
4) Stop waiting for the right time to invest. Investors who do so end up finally investing during highs.
5) Stop wanting to do something with the portfolio all the time. Investors feel compelled to do something fearing they will lose out. Most successful investors do nothing most of the time.
Peter Lynch said “The worst thing you can do is invest in companies you know nothing about.” Unfortunately, investors flocking to direct bond platforms or covered bonds are doing exactly this. With the number of unknowns in financial markets, sticking to simple investments will ensure you stay sane and do not lose capital.
Complexity means distracted effort, simplicity means focused effort and taking over your investing demons.