Market speculation seems to be all over the place. From the release of new SPACs to the dominance of Reddit stocks like GameStop, to the popularity of electric vehicle stocks and the rise of cryptocurrency, speculation in the markets is alive and well today.
Mania is a good word to describe the energy surrounding these types of investments. Sharp daily fluctuations are the new norm in these farms. Hollywood elite and business tycoons associate their names with cryptocurrency and the latest SPAC investments.
The main areas of investment in mania are electric vehicles, cryptocurrency, Reddit stocks, space, SPAC, precious metals, and pot stocks. The dictionary definition of mania describes “excessive or unreasonable enthusiasm.” It seems right. The result was skyrocketing value, not related to the fundamentals of the business, but rather from hype, expectations or predictions.
Investors looking to increase profitability often wonder how much they should have access to these types of investments. With a strong appraisal of some of the holdings, it is tempting to step into the game. Here are eight of our top tips for investing in mania.
1. Admit it is mania.
Think honestly about the investment environment you are in. Investing mania can be fun, addictive, and ultimately painful. But investing mania is not your usual long-term investing strategy. Recognize that you are obsessed with mania and understand what this might mean in regards to your tactics. It’s impossible to explain to yourself or your friends the basics of a no-profit company, so stop trying to figure it out. This is a mania, not an investment based on fundamental principles.
2. Develop an exit strategy and set a target price.
How far are you willing to watch your investment fall before you go? Set a target price and stick to it. Some of the biggest mistakes happen to investors who fall in love with a company or product and hold them back by closing their eyes. Investing Mania is usually not a long-term game, and you have to plan what kind of risk you are willing to take. Set a goal to quit and limit the risk of negative consequences.
3. Limit overall portfolio exposure.
If you are going to become a manic investor, you may be able to limit your exposure to 3%, 5%, or 10% of your total portfolio. Understand that this is a high-risk part of your portfolio, and don’t set aside more than you are willing to lose. The older you are and the closer you are to retirement, the less you can afford to lose. The younger you are, the more you are willing to devote to more aggressive strategies.
4. Diversify your obsessions.
Maybe you like cryptocurrency – go ahead and invest in it, but buy three different types rather than one to diversify. Maybe you like electric cars. If so, consider adding some exposure to space or precious metals. Even in your investing mania, you don’t want to concentrate all this allocation on one strategy mania. Diversification can help reduce risk, even in a risky area. Be careful with over-diversification though. In the world of electric vehicles, the chances are that there will be few winners and many losers.
5. Analyze performance in context
The average value of the 10-year S&P 500 over the past 100 years is about 10% per annum. Warren Buffett receives an average of about 15% per year. If your investment in mania yields 100% in a year, realize how rare this is, and that the chances of duplicate results year after year are incredibly small. Part of good investment results is not only making money during good times, but also overcoming losses during difficult times.
5. Know the difference between investing and speculating.
Long-term investing has its own set of rules, rules and expectations. Investing mania is more like speculation or even gambling. It often fluctuates sharply in price over a short period of time. This can be media buzz, social media memes, and investment tips from inexperienced people. Be careful and understand that speculation is a high risk game – it is not the same as investing wisely in fundamentals.
6. Withdraw winnings from the table.
Perhaps you own one of the stocks that have doubled or tripled in value over the past year. Consider selling some assets and taking profit. Possibly reduce the exposure by 50%. Keep some of the holdings for a little longer, but diversify into something more stable or consistent. Setting a price target upward can be just as important as setting a downward target.
7. Don’t play on the farm.
If a smart gambler travels to Vegas, he will set his own personal limit on what he is willing to lose. Whether it’s $ 100 or $ 10,000 – set the limit when it comes to investing mania. Also, don’t waste all your retirement money on a whim to pursue mania. While the portion may make sense, the lion’s share of your retirement should be focused on fundamental investment strategies that are consistent. Spending all your retirement money on various manias is likely to be a crazy idea, just as it would be impractical to put your house keys in a poker table pot.
Investing in some of these attractive stocks and industries is attractive, and there is money here. But there is money to be lost, and it’s important to have a set of rules for investing, even if you’re investing in stock mania. Finally, know how risk taking can fit into your overall financial plan, and realize that the risk you are willing to take is likely to be different from someone else’s.
Investing carries an inherent element of risk, and when investing in securities, you can lose principal and interest. Strategies are used to help manage your account. Even with these strategies applied to the account, it is possible to lose money. No strategy can guarantee profits or prevent losses. There may be times when the strategy switches between stocks or fixed income at the wrong time, resulting in the account losing potential profit.
CEO – Senior Wealth Advisor, Sterling Wealth Partners
Scott Landborg has over 17 years of experience advising clients on retirement planning strategies. Scott is the CEO and Senior Wealth Advisor at Sterling Wealth Partners. He hosts the retirement planning podcast Retire Eyes Wide Open. Scott is a regular contributor to Kiplinger.com and is quoted in US News & World Report, Market Watch, Yahoo Finance, Nasdaq, and Investopedia. He also officially hosted the nationwide radio show Smart Money Talk Radio.
Investment Consultant, Representative of USA Financial Securities. FINRA / SIPC Member Registered Investment Advisor. CA License No. 0G89727 https://brokercheck.finra.org/