First-time investors believe that chasing yesterday’s returns would gain them same return in the future, and flock to the ‘unsuitable areas’ and investments that have produced the best return in the past such as stocks, cryptocurrencies and initial public offerings (IPOs).
Wealth Within’s chief analyst, Dale Gillham, warned that when presented with a choice of having a blue-chip portfolio or growth portfolio, over 90% of investors would choose growth because they believed they would make more money from this style of portfolio.
However, growth investments had much larger swings in price than defensive assets and, as such, investors needed to be able to handle this risk and inexperienced investors tended to buy growth assets that had already risen through fear of missing out or they sell out too early for fear of losing.
According to Gilham, based on this behaviour, there were two lessons that could be learnt: the first was that investors could not buy yesterday’s returns because buying into something that had already risen strongly believing you would gain the same return in the future was a flawed strategy, and secondly, investors should invest in assets that were congruent with their risk profile.
“Let me say that risk is a far more important consideration than the return you will achieve when assessing an investment, which is why this should be every investor’s number one priority. Right now, there are masses of inexperienced investors attempting to profit from Bitcoin believing it will achieve last year’s return in the next year,” he said.
“Of course, when it is rising, everyone is blissfully unaware of the risks. But once again, this thinking is flawed, as Bitcoin is a very volatile investment and when it does fall, it falls heavily.
“Unfortunately, when Bitcoin does start to fall again, many will see how risky this investment really is, particularly the inexperienced. No doubt, those who have put their money in Bitcoin or other cryptocurrencies will come to regret their decision.”