People don’t always act rationally, and they don’t always invest rationally either. Stock prices may not follow expectations, and emotions may cause impulse decisions.
New acronyms have shown up on Reddit in the last few months that have become associated with investing. As Stephen King once wrote: “Sooner or later, everything old is new again”. In this case, the emotional investing behavior is old, but the framework to talk about it is new again. Here are some examples:
- New saying: YOLO, or “You Only Live Once”
- Previous saying: “Nothing Ventured, Nothing Gained”; “Carpe Diem”
The term “YOLO” has become a new way of suggesting to seize opportunities without worrying about the long term. It stands for “You Only Live Once”, and is suggestive that one should take big risks because they won’t have a second chance to.
It’s true that by risking more you stand to gain more, but you stand to lose more as well. When one is young, an aggressive portfolio might seem most appropriate, because one has the time to earn the money again if they experience losses. However, early gains and early losses should be considered in terms of the time value of money. A diversified portfolio can reduce risk so that if something does go awry, the exposure won’t be as devastating. Market dips may present the best buying opportunities, but they’re also the toughest times, emotionally, for making a commitment to an investment.
- New saying: “HODL, or “Hold On for Dear Life”
- Previous saying: “the die is cast” or “don’t change horses in midstream”
Many may have thought that “HODL” was a misspelling of “hold”, but this new acronym stemmed from the recent cryptocurrency investing market after the first major crash of Bitcoin. It is meant to suggest that one should just keep holding and not try to stem losses by selling because the market will come back. In that case it did come back, but that doesn’t mean it always will. The value of many things fall to zero and never come back.
We feel the Anchoring bias, and create reference points that would show us as correct or incorrect. The decision was made, and we don’t want to decide against ourselves, and change course. This is known as the sunk cost fallacy.
- New Saying: FOMO, or “Fear of Missing Out”
- Previous Saying: “If John jumped off a cliff, would you jump off too?” and “birds of a feather flock together”
Because of confirmation bias, we are more likely to buy into what we see our peers doing or see the market doing as a whole. It can be difficult to see another’s success on an outsized risk and feel foolish for not jumping in, because hindsight makes things seem obvious that were not. Just because a bet worked out in the end, doesn’t mean it was a wise bet to make. At least when going with what most others are doing, if the investment does poorly, one has plenty of fellow sufferers with whom to commiserate.
On the other hand, by using metrics beyond market price, one may determine whether the popular opinions are over or undervalued and adjust accordingly.
Successful money management is about more than understanding market trends or investor behavior.
There are many ways to make money in the financial markets. Some investors favor growth, others value. Some need income, others prefer capital appreciation. Risky bets versus safe bets, large companies versus small companies versus blends—the variables in crafting an investment portfolio go on and on. It becomes a question of balance. The bigger question may not be which market strategy is always the best, or which stock is the best, but how does one fit all the strategies into one’s life stages, and which is most appropriate given where one is in life at this moment?
No one should feel as though they are “Holding on for dear life”, in order to be a successful investor.
That’s where a professional client advisor, such as those at Arvest Wealth Management, can help.
A financial co-pilot can recognize when major life events call for a change in risk tolerance. A financial professional is someone ask to how much insurance one needs when a first baby is born, how to mitigate risk in a portfolio, or whether one has enough assets to take the next step toward a dream home or retirement. At Arvest Wealth Management, we have a dedicated team of financial professionals with specialized areas of expertise who help navigate building, managing, preserving, and transitioning wealth.