There are a few ways in which investors distract themselves from their long-term plans. The most common way is to fall prey to the cycles of fear we all fall into when a major world crisis or market downturn arrives. In these moments, the fear of uncertainty leads investors to become short-term focused, often abandoning the discipline and patience that long-term success requires.
The other way investors distract themselves is by buying into the cycles of hype that appear when specific trends, sectors, or technologies become popular. The companies best positioned to benefit from the publicity become the focus of investment speculators, providing the financial media an easy way to fill pages. Inevitably a few stocks soar, with many investors worried about missing out.
On the surface, these cycles of hype appear harmless. They arrive with waves of positivity and excitement, emotions welcomed by investors tired of navigating one crisis after another.
While even the most disciplined investors can be forgiven for taking a punt with an amount of money they could afford to lose, these cycles become dangerous when moderation is thrown out of the window. When significant amounts are wagered on short-term trends, long-term financial plans are in danger of being ruined.
The investor has now become a speculator. They’re playing a short-term game that’s difficult to win. It’s usually the insiders and “early adopters” that make the real money, with the speculator buying at prices that already reflect the very high expectations of the market. From this point, any disappointment in company earnings can lead to sharp declines as fickle investors move on to the next craze.
The skills and mindsets you need to excel at this short-term game consistently are the opposite of those you need for long-term success.
In the middle of a hype cycle, these words of caution may ring hollow for many. However, by studying recent hype cycles, it becomes clearer to see that the irrational exuberance we feel from time to time might need to be suppressed if we want long-term prosperity.
While the arrival of a new cycle is celebrated with fanfare, not much analysis is done when sobriety has set in. In 2017 and 2018, the famed technology stocks known as FAANG (an acronym that refers to the stocks of five American technology companies: Meta – formerly known as Facebook, Amazon, Apple, Netflix, and Alphabet – formerly known as Google) received a lot of media attention for their significant outperformance against the market. Many investors became convinced that these shares were the only ones they needed to own. However, from the end of 2021 till today, these shares have significantly underperformed the general market. New trends have arrived, and many investors who got enticed were left high and dry with concentrated portfolios.
Similarly, from the end of 2020 till the end of 2021, the cryptocurrency hype peaked for a third time. During this period, decentralised finance became a hot topic, and with it, Non-Fungible Tokens (NFTs, think digital images of Apes). Again, the media hailed a new age for investors, prompting many to make aggressive portfolio changes. Since then, Bitcoin and NFT prices have plummeted.
We are currently going through the Artificial Intelligence (AI) hype cycle, with the manufacturer of graphics processing units, NVIDIA, receiving the most investor attention.
As we’ve warned in this article, it’s essential to understand that the world’s attention can shift just as quickly as it arrived, and there’s no guarantee that investors will be the ones to benefit. If you’re currently invested in a diversified mix of the right asset classes, no new hype cycle should require you to make significant portfolio changes.
As we often say, our job is to remind you what’s always worked, not to talk you into the strategies that are working now (for a while). As the financial writer Morgan Housel so elegantly states, “The most important question to answer as an investor is not, ‘How can I earn the highest returns?’ It’s, ‘What are the best returns I can sustain for the longest period of time?'”.