Investing: Why The Fear?

Investing can be a risky business, and it's not hard to see why some people think it's a bad idea. The most common regret among investors is not investing at all or not starting early enough. However, investing in the wrong things can also be a costly mistake.

Some people are deterred by the risk of losing money, especially in volatile markets such as cryptocurrency. Others may be overwhelmed by the complexity of investing, the potential for fraud, or the environmental impact of certain investments.

It's important to do your research, understand the risks, and make informed decisions that align with your financial goals and tolerance for risk.

People may not have a robust investment portfolio yet

When creating an asset allocation for your portfolio, it is recommended to limit alternative assets to 10-20% of the total portfolio value. Alternative investments can include cryptocurrencies, but also other types of investments. If you don't have a robust portfolio yet, it might make sense to bulk up on more traditional assets before adding riskier alternatives.

It is also important to diversify your investments. This means not putting all your eggs in one basket and investing in a variety of different assets. By investing in more than one asset category, you reduce the risk of losing money and smooth out the overall investment returns of your portfolio.

It is also recommended to invest in a broadly diversified portfolio. This means investing in a variety of different companies, industries, and sectors. This helps to reduce the risk of losing money if one company or industry performs poorly.

Additionally, it is important to consider your financial goals and risk tolerance before investing. All investments come with some degree of risk, and it is possible to lose some or all of your money. It is important to understand this risk before investing and to only invest money you can afford to lose.

Overall, if you don't have a robust investment portfolio yet, it is important to do your research, understand the risks involved, and consider diversifying your investments and building a solid core portfolio before adding riskier alternatives.

It's hard to value cryptocurrencies

Unlike stocks, commodities, or real estate, it is challenging to place a value on cryptocurrencies. They are intangible, and their value is highly volatile.

Cryptocurrencies are not backed by a central authority like governments or banks, which would otherwise improve faith in their value among consumers. Instead, their value is derived from other sources, such as supply and demand.

The value of a cryptocurrency is determined by its availability on exchanges and the demand for it. The more units of a cryptocurrency there are, the less valuable each unit is. For example, if a large amount of cryptocurrency becomes available to the public, its price will likely drop.

Demand can increase as a project gains awareness, or as its utility increases. For instance, Ethereum has utility because it gives users access to some of the world's most popular decentralised applications and NFTs. Broader adoption of a cryptocurrency as an investment also increases demand while effectively limiting the circulating supply.

The monetary policy of each cryptocurrency is different. Some have a fixed maximum supply, while others have no cap on supply. Some cryptocurrencies have mechanisms that "burn" existing tokens to prevent the circulating supply from growing too large and slowing inflation.

As mining costs increase, the value of the cryptocurrency must also increase. Miners are essential to making the blockchain function, so as long as there is demand for using the blockchain, the price will have to go up.

Regulations and legal requirements can also impact the value of cryptocurrencies. While the Securities and Exchange Commission (SEC) says cryptocurrencies are securities like stocks and bonds, the Commodity Futures Trading Commission (CFTC) says they are commodities like coffee or gold. A determining ruling could improve cryptocurrency values while opening the door for more widely traded crypto-related financial products.

However, regulations could also negatively impact demand for cryptocurrency. If a governing body changes the rules to disfavour cryptocurrency investment or use, it could send the price of cryptocurrencies lower.

Due to the many factors influencing the value of cryptocurrencies, it is challenging to place a definitive value on them.

People may be influenced by FOMO

FOMO can be a "killer" for investors, leading to significant losses. It is important for investors to remember that thoughtful risk management and asset allocation are key to long-term success. Diversification is crucial to reducing risk and protecting against significant losses. A diversified portfolio with a mix of assets such as stocks, bonds, and cash can help investors ride out market volatility.

It is also important to understand your risk tolerance and have a long-term investment plan that meets your financial goals. Investing in risky assets may offer the potential for higher returns, but it is important to consider if you need to take on that additional risk. Calculated risks that are based on historical data and long-term trends are generally safer than those based on FOMO.

FOMO can be difficult to control, but it is an important financial skill to develop, especially in the social media age. One way to do this is to focus on the bigger picture and avoid trying to predict the market's next moves. Another strategy is to discuss your financial goals and the probability of reaching them with a financial advisor, which can help put short-term FOMO in perspective.

People may not understand the company they're investing in

It is important to understand the company you're investing in, and many people may not have the time or knowledge to do so. Truly understanding a company's balance sheet and overall financial direction requires specialised knowledge that most investors do not possess. While there are online resources that can help educate investors, it still takes time to learn about a company and its future prospects.

By only investing in companies that you are familiar with, you may miss out on fast-rising companies. Many of the biggest returns will be made from companies that are in the earlier phases of growth, and these companies are often not well-known. For example, Cisco Systems and Microsoft were once small companies, and investing in them early would have yielded huge returns.

Additionally, investing in well-known companies can introduce risk to your portfolio. If you invest heavily in a company that you are comfortable with and that company does poorly or goes bankrupt, you will likely lose a lot of money. It is important to diversify your investments to lessen the risks of investing.

Therefore, it is crucial for investors to conduct thorough research and due diligence on companies before investing. This includes understanding the company's business model, financial statements, and future prospects. By investing in a diversified portfolio of companies across different industries and sectors, investors can reduce the risk of losing money if one company underperforms.

People may be overconfident in their abilities

Overconfidence bias is a tendency for people to overestimate their abilities, and it can be a significant hurdle to successful investing. It can cloud people's judgment, leading them to make ill-advised or overly aggressive investments based on a false sense of security. This bias often results from an illusion of knowledge or control, causing individuals to view their investment decisions as less risky than they are.

People with overconfidence bias may disregard data and expert advice, instead relying on their own (often flawed) understanding of financial markets and specific investments. This can result in poorly timed trades or a concentration of investments in risky assets. Overconfident investors also tend to trade more frequently, which is generally less successful than a buy-and-hold strategy.

The availability of vast amounts of information online can contribute to overconfidence bias, creating an illusion of understanding. However, without sufficient knowledge and context, investors may not be able to make effective use of this information.

To combat overconfidence bias, investors should seek a reality check by reviewing their past performance and the actual outcomes of their investment decisions. They should also consider getting a second opinion from family, friends, or a financial advisor before making investment decisions. Advisors can help by encouraging clients to consider other perspectives and performing a "premortem" strategy, which involves imagining potential future outcomes of an investment strategy.

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