A lot of people are making a lot of money in a short period of time. This may be harmful to your financial well-being.
The two most influential emotions in the investor’s decision-making toolbox are fear and greed. One is a more powerful motivator than the other.
Fear, like greed, makes people do things they regret later on. But greed, unlike fear, commands action. Investors can be fearful yet sit on their hands. Watching everyone around you get hilariously rich while you’re not will make even smart investors do stupid things.
When the market is cratering, you can take comfort in knowing that we’re all in the same boat together, hanging on for dear life. Misery, as the saying goes, loves company. But when you see your friends making money faster than you are, a part of the brain is triggered. We can only hold out for so long. One way to feel like you’re not missing out is not to miss out.
Here’s what I mean. There’s nothing wrong with eating a rich alfredo sauce now and then if you control your portion size. Same thing with speculative investing. Want to pay 60x sales for Zoom? Go for it. Just make sure that you have the stomach to watch it get cut in half.
One of the benefits of keeping it small is obvious. If you buy at the top, no harm, no foul. But there’s another side that’s important here too. What if you’re right? What if you buy a stock that goes up 10x? If your initial position is too large, it will quickly swallow your entire portfolio. Every 3% move up or down will rock your portfolio like it’s the Andrea Gail.
I feel it right now. It’s impossible not to. But I know that the pendulum swings from fear to greed and back a hundred times every year. It’s an investor’s job to stay in the middle.
Michael Batnick is a managing partner at Ritholtz Wealth Management. He is the co-host of Animal Spirits, What Are Your Thoughts, and The Compound and Friends. For disclosure information please see here.