No matter how committed you are to your long-term financial goals, it can be easy to become distracted from your investment strategy by external factors such as market conditions.
Often, it’s the cycle of fear that tends to accompany market volatility that can cause you to lose your nerve. If your investments aren’t performing as well as you hoped, the emotions you experience could lead you to abandon your long-term strategy and focus on trying to generate short-term returns. This can be detrimental to your wealth accumulation and jeopardise your ability to meet your financial goals.
At the other end of the spectrum, though, there is another type of distraction that can be equally as dangerous for your wealth: the hype of a new investing trend.
Whether it’s a new type of technology or an entire sector that appears to be outperforming the rest of the market, the headlines can quickly spiral. Soon enough, you might be experiencing a fear of missing out on something potentially groundbreaking. But, in reality, there is usually only a small minority who will profit.
Short-term trends can jeopardise your long-term wealth
While it’s always nice to see some positivity surrounding the stock market rather than uncertainty and fear, it’s important to keep your wits about you when considering investing in something new.
Of course, if you decided you wanted to test out one of the trends you’ve read about with a small amount of money that you’d be willing to lose, the experiment could be harmless. But if you find that you’re wagering larger amounts of money than is sensible, that’s when the trends can go from being a fun experiment to something much riskier.
If you start to make significant changes to your portfolio based on short-term results, you’re speculating rather than investing strategically. When this happens, it’s usually very difficult to profit sustainably. This is because by the time a stock becomes a trend, its price has already risen sharply to reflect the high expectations surrounding its performance.
When a stock reaches this point, even the smallest drop in the company’s earnings can mean that investors who believed they were about to make lots of money abandon their shares. When lots of investors do this at once, the share price can fall dramatically.
There have been several examples of this over the past decade
It can be helpful to look back at recent investing trends to see this scenario in action.
In 2017/18, technology stocks Meta (previously Facebook), Amazon, Apple, Netflix, and Alphabet (previously Google) were frequently in the headlines for outperforming the wider market. The group is known as FAANG, and a lot of people interpreted the news to mean that investing only in these five stocks would allow them to generate superior returns compared to investing in the wider market.
Fast forward to today, however, and you’ll see that since the end of 2021 the shares for these companies have not outperformed the general market. Investors who went all in on the FAANG stocks rather than diversifying have found that their highly concentrated portfolios have not performed as well as they believed they could.
Cryptocurrency is another trend that has seen several periods of hype. From the end of 2020 to the end of 2021, the sector became very popular among investors and non-fungible tokens (NFTs) appeared in headlines frequently as “the next big thing”. Yet, since the end of 2021, share prices for decentralised finances such as bitcoin have fallen sharply.
Make sure any portfolio changes you make are for the right reasons
The most recent hype cycle to have begun is that of artificial intelligence. The recent release of the NVIDIA graphics processing units – which help to train artificial intelligence models – has piqued the interest of investors looking for a new craze to follow.
But just like the examples you’ve read about above, the interest in this new stock could be over as quickly as it has begun. Its current popularity is no guarantee that it will provide sustainable high returns for those who invest in it.
Instead of jumping onto the band wagon without thought, keep in mind the fundamental principles of investing. In particular, remember that a diversified portfolio – balanced according to your own personal risk profile and long-term goals – is usually the most sensible course of action for those pursuing long-term, sustainable returns that will give you the potential to hit your financial goals.
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