One of the biggest motivators for speculative investing remains hidden to most people.
If you ask someone who buys and sells stocks with the goal of realizing short-term gains why they do it, they will probably say that it’s to make money.
Of course, making money is the goal of every investor. However, repeated analysis has shown that the most consistent and reliable returns are most likely to come from holding a diverse portfolio over the long term. This is what you do if you’re really serious about making money over an investing lifetime.
But buying an investment and seeing it go up gives the immediate thrill of winning. More than the good feeling of monetary gain, it gives the deep psychological satisfaction of being in control.1
When it works, if feels something like this: You were smart enough to identify a bargain. You had the guts to put money on it. And now you enjoy the feeling of being a winner. Psychologists have long known that this is what makes gambling so addictive. And conversely, this is why gamblers who are not winning will keep playing until they can make the feeling of being a loser go away.
Since the prices in the market (theoretically) reflect all available and even speculated about information on an investment, it would be logical to think that significantly undervalued securities are rare. After all, by the time you’ve heard about the latest hot stock or fund, so has everybody else.
But analysts have been noting that when an investment gets a reputation for being the next big thing, the influx of money from short-term investors can temporarily raise its current price in a sort of self-fulfilling prophecy.
Wall Street Journal columnist Jason Zweig explains how this can happen to an exchange traded fund (ETF). “(Investors) buy the fund in droves, pouring in hundreds of millions or even billions of dollars. The ETF’s managers take that cash and pump it into the stocks the fund already owns. If those stocks are small and thinly traded, the funds own buying will drive their prices up.”2
This will raise the ETF’s value further, attracting even more money, and repeating the cycle.
Zweig gives the example of ARK Innovation (Ticker: ARKK). This actively managed “disruptive innovation” fund had nearly a quarter of its $1.6 billion in assets in only nine stocks. As returns flared, new money piled in, the underlying stocks soared, and over the next two years the fund’s assets ballooned to $25.5 billion. Then performance faltered, the hot money fled, and ARK Innovation has lost an average of 27.9% annually over the past three years.
On its way up, the fund made a lot of people feel very smart — temporarily. But when the underlying stocks reverted to more normal prices, many investors received an expensive and unpleasant education in the risks of speculation.
The prudent investor understands that emotions, both good and bad, almost always drive poor investing decisions. By contrast, the road to a successfully funded retirement is marked by diversification, discipline, and a realistic view to market rates of return over the long-term.
If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.
Regards,
Mark Lund
Stonecreek Wealth Advisors, Inc.
11576 S State Street, Bldg. 1002
Draper, UT 84020
Sources:
1. http://go.pardot.com/e/91522/pmc-articles-PMC2658737-/95cjr3/2406468821/h/prfBujNQE2JaaiMWPxX7lWHI70oIrS_GtRyL_DNohQk
2. http://go.pardot.com/e/91522/self-inflated-returns-258e875e/95cjr6/2406468821/h/prfBujNQE2JaaiMWPxX7lWHI70oIrS_GtRyL_DNohQk
Disclosure: This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by Efficient Advisors, LLC (“EA’) for Mark Lund, Mark is a Financial Advisor in Utah. He is known as a Wealth Advisor, The 401k Advisor, Investor Coach, Financial Planner, Investment Advisor and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment management and retirement planning for individuals and 401k consulting for small businesses. Mark’s newsletter is called The Effective Investor Newsletter. Cities served in Utah are: Salt Lake City, Salt Lake County, Utah County, Park City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, American Fork City. The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
