Focus on outcomes and investment process, not shiny bright objects
What the FOMO is going on? Fear of Missing Out (FOMO) has moved into the investor psyche. And, it has become the thing that wouldn’t leave.
This has prompted investors of many many varieties to ask their financial advisors and themselves the type of questions that don’t often come up. Whether it’s an 80-year old retiree, a 48-year old business executive, or a 20-year old college student, it seems that hunting for “rocket” investments is the new national pastime. And, when the proverbial national pastime, baseball, returns in a few weeks, I do not expect aggressive investing fever to break.
Whether it’s Bitcoin, high-flying meme stocks, SPACs or other headline-grabbing investment genres, there seems to be an insatiable desire to own them. Or, for newer investors, to figure out if they should own them.
I will not bore you with the concerns we investment strategists have when investment sentiment gets this frothy. I and many other commentators have said plenty about this in the buildup to this phase of the investment market cycle.
While you may assume that “being more aggressive” is what you want out of your investment portfolio, that’s not really what you want. What you really want is to find something that will go up in price at a faster rate than your “normal” buy-and-hold or otherwise traditional market-based portfolio. That’s understandable, when it seems your neighbors and friends are all getting rich.
However, when we break this down, it turns out that the way to reach your desired end does not justify the means many are taking to get there. They are making a mistaken, but very dangerous assumption.
That is, they think that the way to earn higher rates of return is to accept more risk. That is what we were all taught years ago, as part of Investing 101. However, that is wrong. And in today’s market climate, not realizing that can be a 4-7 figure dollar error, depending on how large your portfolio is.
Investing in volatile assets does get you something. It gets you…a volatile asset! That puts a much greater burden on you or your investment manager. At a time when even the S&P 500 is moving at 2-3 times the speed, up and down, as it did in years past, the more you go out the “aggressive” curve, the greater risk you take of skewing your returns the wrong way.
In other words, investing in things that are volatile, and which have appreciated greatly in the past few years, is a recipe for disaster. It is the 2021 version of the Greater Fool Theory. That’s when you buy something and rely on someone (anyone!) taking it off your hands at a higher price than you bought it for.
When this goes wrong, it ends up like the Nasdaq 100 Index (QQQ)
QQQ
, which peaked in March of 2000, and did not return to that level until…wait for it…December of 2016! With that type of scenario in mind, how do you try to take advantage of today’s investment climate, without making judgements about your risk tolerance that you are bound to regret later on?
Consider “tactical” investing with a “contrarian” bent
I suggest investors and financial advisors devote less time to buying what is “obvious” according to headlines and family members. Instead, learn to develop a tactical process that recognizes that higher volatility exists everywhere in today’s markets.
In other words, don’t increase the volatility of the investments you use. Increase the frequency with which you rotate through a set of investments. And, establish some risk-management rules.
This is a version of the old investment saying, “cut your losers, and let your winners run. The difference here is that in most cases, even the winners won’t be allowed to run for years. The current market environment is such that trying to buy and hold throughout your entire portfolio is courting much higher risk of major loss than at any point since 2008, or perhaps earlier.
One of the big stories of 2021 so far has been the revival of stocks and sectors that have been serial underperformers since the financial crisis over a decade ago. Energy stocks, financial companies and others that pay above-average but financially-stable dividends have gone from laggards to leaders.
In many cases, this occurred without the drama of 10-20% daily price swings. No one really wants to run to the kitchen to grab a sandwich, come back to their desk and find out that one of their holdings has fallen by a big dollar amount.
Here are the basics of tactical investing with a contrarian mindset:
Train yourself to methodically follow a repeatable routine to identify investments that are down but not out (”contrarian” investing)
Add a level of discipline and consistency to what you are willing to own
Enter investment positions, while simultaneously establishing strict risk-management parameters
Act with conviction and without emotion, staying only as long as your investment process suggests. In today’s markets, that may involve holding periods of weeks or months, where you used to hold for years. That’s the “tactical” part of this.
This should promote greater peace-of-mind, and less temptation for FOMO. It should also result in better treatment of your hard-earned wealth.
Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
