What is it about human behavior that has us all chasing the newest, shiniest investment that comes our way? Each and every year some new topic has the markets all excited and people rush out the door to figure out how they can take advantage of it. But the thing we have to try to focus on is what SHOULD we be chasing with our time, attention, and money.
Let’s look back to the theme for 2017: Bitcoin & Cryptocurrencies
Last year, people went nuts at the first sign of Bitcoin’s price skyrocketing. Without understanding what Bitcoin actually is, how cryptocurrencies work, or even what to do with a Bitcoin, billions of dollars continued to rush in.
The price of Bitcoin climbed more than 1,000% during 2017 and led every news outlet on the planet to allocate at least a few hours discussing the topic. Immediately your plumber, barista, mechanic, and attorney were all cryptocurrency experts and you were the idiot.
So, what exactly happened?
My guess… the FOMO got a little out of control.
In the end, most global markets became volatile at the start of 2018, and so did the price of Bitcoin and other cryptocurrencies.
If we look at the Google Trends over the past year, as soon as the market volatility picked up and the price of most cryptocurrencies plummeted, consumer interest flatlined.
Source: Google Trends
If we run this scenario over and over again, there are dozens of other topics the average investor will chase. From international stocks to real estate, we could swap Bitcoin with any other asset class and see similar results in some prior year. We are consumed by the FOMO and seeing others make great returns, so we instinctively chase after whatever seems to be doing well.
So, thank you to Meb Faber for finally putting together this simple and elegant overview of where investors SHOULD be focusing their time.
If you take a look at Meb’s Investing Pyramid, we see the core of any financial plan should be focusing on emergency cash and paying off your debt. If you’re making 15% annual investment returns but paying 20% credit card interest, you’re going nowhere. You need a strong foundation to build a home and with investing that starts with a strong personal balance sheet.
Investments should be one of the LAST areas an investor should be spending their time and energy. If you think you have a real edge against the millions of investment professionals and computer algorithms across the globe, you are in for a rude awakening.
Focusing on the basics of personal finance, budgeting, and simple financial planning will vastly improve the outcomes of investors instead of grabbing an extra few percentage points of returns in your 401k.
With personal finance comes personal development. Continuing your education, completing certifications, excelling at your job, improving your well being and community involvement. All of these areas will provide stronger personal and professional returns than trying to focus on your investments to make up the difference.
Stop focusing so much on the small minute details like your annualized investment returns and instead focus on how to improve yourself and your household finances. Beating the market in 2018 will do almost nothing towards your retirement. Instead, pay off a few extra bills, advance your mortgage payments, or consider contributing more to your tax-advantaged accounts.