The ongoing market volatility provides a valuable lesson for us all. Investing is harder when we swerve out of our lane and into oncoming speculative traffic.
Go back to the 1995 film, Clueless. After a driving lesson goes terribly wrong, the valley kids are almost squashed by a tractor-trailer, harassed by a motorcycle gang, and given the finger for driving too slowly by old people.
If only they had remained in their comfort zone and taken their lesson on quiet residential streets rather than a 12-lane highway!
The same goes for investing. Bad things can happen when we abandon lower risk index funds and venture into unchartered financial shark-filled waters.
One of the most important characteristics of successful investors is that they know their limits. With markets, past performance is not indicative of future performance, but with investors, past behaviour is quite indicative of future behaviour.
Why do we do this? Expertise is domain specific. When experts in one field shift their attention to another field, performance retreats to the novice level. Investing is no different.
In the last year, many investors lost their shirts swerving out of their lane at the worst possible time. Jumping into trendy Cryptocurrencies and companies that decided to randomly insert the word Blockchain into their ticker symbol. Next on the list, the likely impending blow up of many over-hyped marijuana stocks.
Look at what recently happened to Alliance One International Inc when it changed its name to attach itself to the pot stock craze.
Now Pyxus International Inc, a tobacco supplier and a newcomer to the marijuana market, went by its former name for the past 145 years up until September this year. Due to investor frenzy with cannabis, Pyxus stock doubled its market valuation in the space of just three days.
In the words of CNBC commentator Josh Brown, "Are there not enough publicly traded stocks to go around?"
Let me think about that for a millisecond – Yes!
The same formula is applicable to any era or speculative investment of your choice.
Media Fuelled Hype + Greed + Overconfidence = Future Pain.
Arguably the world's greatest trader, Jesse Livermore, once said, "There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure."
Ironically, Jesse couldn't follow his own advice. He ended up bankrupt and committed suicide.
Civilisation is no different regarding cycles repeating themselves. The only thing that changes are the players.
According to author and entrepreneur Ryan Holiday, "One of the most striking things about history is just how long human beings have been doing what they do. Though certain attitudes and practices have come and gone, what's left are people - living, dying, loving, fighting, crying and laughing."
Add to the list, speculative investing using a misguided risk management strategy.
The media magnifies get rich quick schemes to give an appearance of authenticity and uniqueness. Resisting this urge is difficult.
If you lack the support of a level-headed financial adviser to curb your enthusiasm, ask yourself this question.
"Can I afford to lose all the money I decide to put into this scheme?" You probably will.
Know your limits and stay in your investing comfort lane. Safe and steady is a far better choice than a wild ride and financial crash.
* Geoff Wilson is a Registered Financial Adviser and KiwiSaver Adviser at Stewart Group – a Hawke's Bay-based independent financial advisory firm based in Hastings. Stewart Group works with individuals, families, and businesses in New Zealand who are committed to pursuing financial planning and wellbeing. Our clients understand the value of independent, goal oriented and objective financial advice that is free of conflicts. If that sounds like you, we would love to hear from you.
* 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 an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.