E L Emerson
Few things are more damaging to financial decisions than laying a ruler down over a current trend, extending that line forward and believing that’s what’s going to happen next.
Let me give you a few examples of what I mean.
Bitcoin: Bonanza or Blues?
One of the most popular coal face investments going right now is the cryptocurrency Bitcoin. You can read more about Bitcoin and the Blockchain here, but for now let’s look at what’s happened over the past twelve months.
In 2017, the value of a single Bitcoin rose from approximately $1,000 to upwards of $18,000. That’s an incredible trajectory. And naturally, everyone wanted a piece of that rise in the belief that it would continue – investors and gamblers alike essentially put a ruler over the last 12 months, extended that line forward and bought in.
Of course, Bitcoin hasn’t been without its $multi-thousand hiccups to the downside, at which time those same folks put the ruler over the downturn, panicked and tried to sell out quickly and cut their losses. Many found that selling-up process for cryptocurrencies to be less than a straight line.
You may have heard of an index tracker investment. It does what it says on the tin. It tracks the movement of an index by buying what’s going up and selling what’s going down. And in doing so is a classic “lay a ruler on it” investment vehicle.
Now, in principle this might sound like a good option – an automated mechanism that finds the good deals for you and dumps the non-performers as you go. And when you’re in a bull market, as we are right now, and we’re regularly setting new major index records in the Dow Jones, Nasdaq, S&P 500, Asian stocks and every-so-often the FTSE, these things appear to perform well for us.
But there are two problems here. The first happens while the market goes up and the index tracker is buying things on a trend (like Bitcoin) and usually at a much higher price than it should. That’s because the tracker has missed the early gains – it will only purchase stocks that have already gone up in price long enough to be considered as a “buy”, which means trackers almost always arrive late to the party. They also sell at the first sign of trouble (once again, like Bitcoin investors), and that type of short-term knee jerk reaction rarely ever works out well.
The second problem occurs when the market turns. That’s when trackers sell all the way down, reversing the classic investing lesson of buying low to sell high into buying high and selling lower, and lower, and lower as it goes.
Sentiment & Memories
This is the biggie – when investors put a ruler over the last recessionary period (2008/09) and leave it there for about nine years in the never-ending expectation that event will happen again.
And they’re right, of course. Those recessionary periods happen cyclically and are present about 15% of the time in the stock markets.
But what folks forget is that the markets are in bullish territory for the other 85% (or thereabouts) of the time.
There’s no straight line ruler for investing.
But there are indicators out there that you should know about.
We’ll talk about some of those next time on Money Principles.
E L Emerson, Editor, HNW Magazine
Follow HNW here - For the life you want to lead...