Investors often lose sight of their long-term goals due to two main distractions: fear and hype.
Fear, often brought on by global events or market downturns, can cause investors to focus too much on the short term. This can lead to hasty decisions that derail their long-term strategies.
On the other hand, hype, which arises when certain trends, sectors, or technologies gain popularity, can also sway investors. These “hot” companies become the talk of the town, and many investors, worried about missing out, jump on the bandwagon.
What are the pitfalls of hype?
Although hype can be exhilarating, it can also pose risks. One concern is that investors may become overly fixated on fleeting trends, compromising their overall financial strategies. This can lead to impulsive and speculative behaviour as they chase fast profits that are often difficult to attain. Typically, the individuals who profit the most from such activities are those who are already familiar with the industry or those who got in early, while others who arrive later may face high costs and suffer losses if the market does not perform as expected.
It’s important to keep in mind that the abilities required to succeed in the long run are distinctly different from those needed to do so over the short term.
When a new technology emerges, there’s usually a lot of excitement and money invested in it. This is followed by a bumpy phase where the technology is integrated into society. Often, during this time, there is a financial “bubble” – when the price of something rises extremely high, often way beyond its actual value. After a while, this bubble bursts, causing financial losses. Despite the losses, the new technology keeps developing until it has reached its full potential.
The Current Hype: AI
Currently, the buzz is all about Artificial Intelligence (AI), with the company NVIDIA grabbing the spotlight. History has shown that despite the buzz around new technologies, investing in these “bubbles” often results in low returns. This has happened with canal building, railways, infrastructure in the late 1800s and the internet bubble in the 1990s. A 2004 study showed that the higher the uncertainty about a new tech company’s ability to make money, the higher the company’s stock price can rise. However, as people begin to understand how profitable these businesses are, the prices fall. [1]. Historically, investing in industries that are on the decline or companies with low prices has generally led to better outcomes.
Despite this, investors often chase after the next big thing, like trying to find the next Apple or Amazon. This can be as unpredictable as winning the lottery because the financial returns from these new companies are often skewed – most will do poorly, but a small number will do exceptionally well. This makes it very hard to pick winners ahead of time. Remember, trends can change in the blink of an eye, and there’s no guarantee that investors will always come out on top. If you’ve already diversified your investments wisely, there’s no need to make drastic changes every time a new trend comes along.
As financial writer Morgan Housel puts it, the most important question for an investor isn’t “How can I earn the highest returns?” but “What are the best returns I can sustain for the longest period of time?”. So, let’s stick to what’s always worked, rather than chasing after what’s working now.
Remember, technology may be advancing, but the principles of smart financial planning remain. If you’d like to discuss how we can help, book a free, no-obligation chat here.
[1] Pástor, Ľuboš, and Pietro Veronesi. 2009. “Technological Revolutions and Stock Prices.” American Economic Review, 99 (4): 1451-83.
