Dear Mr. Market:
How is it that through both bull and bear markets you are constantly able to create new products and services that entice investors to take on risk beyond what they need in their investment portfolios? Time after time we’ve seen investors rush to get involved in the next great investment opportunity. Just looking at the last few years alone we’ve seen the Facebook IPO, Leveraged ETF’s, Day Trading, Managed Futures… and the list goes on and on. Most recently we’ve seen a new “currency” hit the headlines and attract investors … Bitcoins.
This new digital currency has caught plenty of media attention with the price hitting extreme highs and lows. Just in the last two weeks Bitcoins were worth as much as $260 a piece and then within days they dropped down to $100 a piece. This decentralized digital currency allows for exchange without any regulations or protection. It is based on an online programming code written by a group or an individual that operate under the name “Satoshi Nakamoto”. If that doesn’t make individuals feel secure then knowing that they can never hold these ‘coins’ in their hands but instead can hold them in their online digital wallet definitely should!
This new currency could become a broadly accepted form of currency in the future or just a novelty. But we can’t help but ask – why take the chance now? Why rush into something like this when there is obviously a huge amount of risk and no substantial track record? There is no doubt that a move up of over 77% in just three days will attract investors but keep in mind that Bitcoins traded at just $0.05 only two years ago!
At moments like this investors need to take a step back and not get caught up in the hype of the moment. We’ve all heard the saying….’slow and steady will win the race’ . Rather than get caught up in the quick fix, investors need to take a look at their long-term investment strategy and then see if a position in something like Bitcoins (or whatever the headline catching investment of the day is) has a place in their portfolio.
Research has shown that the driving force for a portfolio’s performance is not based on investment selection or market timing but instead by asset allocation. Studies have shown that over 90% of a portfolio’s return is attributable to its mix of asset classes. Individual stock selection and market timing account for less than 7% of a diversified portfolio’s overall performance. Rather than attempting to catch the next great opportunity, investors would be better served by taking a step back and understanding what their goals are, how much risk they can take, and ultimately what their allocation should be.
There will always be something like the Bitcoin that will tempt individuals with a new story and impressive returns. Rather than “buy into the hype”, individuals need to take the time to educate themselves and realize how any position fits into their overall portfolio.
“The four most dangerous words in investing are: ‘this time it’s different’ ” – Sir John Templeton
We welcome your comments and questions. If you would like to subscribe to the blog please visit our home page.