If you think back to high school science (further back for some of us than others…) you may recall your teacher lighting a strip of unassuming ribbon of magnesium on fire. If they were a good teacher, they probably would have told you not to look directly at it. If not, you would have been temporarily blinded by the significant emission of UV light.
Magnesium burns bright, hot, and fast. You must keep it at arm’s length, held by tongs, and you should not have any close contact with it until it has cooled after the big reaction is finished.
Sounds familiar, somehow…
Much like with that ribbon of magnesium, investments are best observed at your peripheral: You know what’s there, and you can see what’s happening, but you aren’t directly interacting with it because you know how easy it would be to lose sight (thankfully not as literally as with the science experiment).
Seasoned investors know that what burns brightest is almost always a flash in the pan. It’s hot and dangerous and if you don’t take the right precautions, you can end up with nasty burns.
You barely have to scratch the surface to find examples. From crypto and NFTs to GameStop and Peloton, or further back, the infamous dotcom boom – that brilliant light from a shiny new industry or a meteoric stock rise has blinded many unwary investors.
FOMO (fear of missing out) has a lot to answer for in this regard. There’s also a psychological theory known as the Bandwagon Effect, which is when our brain tells us that something is correct because everyone else appears to be doing it. Our brains use shortcuts known as heuristics to make quick decisions, often without conscious thought. If enough people are doing something, your brain will assume that is the right course of action.[i]
It’s a case of monkey see, monkey do. And unfortunately, our monkey brains can trick us pretty effectively.
The best defence against jumping on the bandwagon is to make decisions more slowly. Be slow to jump on any trends so you can gather information and avoid the peer pressure. Or better yet, avoid trends altogether in favour of a more sustainable investment approach.
It’s less exciting to invest using tried-and-true strategies. But it is also a heck of a lot easier on your nervous system, as you won’t be anxiously watching your trendy but very volatile investments swing like some dread pendulum.
Risk and investment go hand in hand. There is no way to invest without some amount of risk. But there’s a vast difference between betting the farm on a handful of skyrocketing stocks, and working with a fiduciary financial adviser to create a strategy that accepts volatility as inevitable and spreads the risk through global diversification.
Realistically, there is always going to be one country, industry, or asset class performing better than others at any given time. But what goes up must come down – and what burns bright will eventually start to sputter and smoke.
Much like the science teacher limiting your exposure to volatile experiments with distance and sage advice, a financial adviser can limit your exposure to volatility in the markets.
There’s a great quote from Warren Buffet where he states, “The stock market is a device to transfer money from the impatient to the patient.” Which is a nice, neat way of saying: There is no get rich quick scheme. Investing takes time, and the sooner you can get started – and the longer you can remain in markets – the better.
For those with shorter timeframes (less than five years, say) there is no need to despair. You may not be suited to a higher risk portfolio without the cushion of time, but the compound interest you can gain from a suitably weighted portfolio will still be more than the compound interest you would get from having your money in a bank account – or worse, under the mattress.
Stay in your seat. Trust in your plan. Don’t panic if your investments aren’t flaring up right away – a slow burn is much better. And if you want a second opinion about your investment portfolio, try a face-to-face chat with your trusted local financial adviser.
by Nick Stewart (CEO and Financial Adviser at Stewart Group)
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 365.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.investopedia.com/terms/b/bandwagon-effect.asp#:~:text=The%20human%20brain%20uses%20%22shortcuts,the%20correct%20decision%20to%20make.
