I’m having GameStop FOMO.
Tesla can’t possibly go any higher, right?
Should I be investing in Bitcoin?
These are just a few of the questions and comments we’ve seen the past couple months. And they make sense! The market bottomed in March 2020, and it’s been a swift and steep recovery since then. But the market returns look tame compared to those seen by investors in BTC, TSLA and others.
So, what’s a wise investor to do?
"Have fun staying poor"
If you’ve come across any Bitcoin truthers on finance twitter, you may have heard this refrain before. Like any good taunt, it’s maddening and succinct in its criticism of you for not putting your entire net worth into Bitcoin.
FOMO is the driving motivation underlying all those questions above, and the reason why you just can’t seem to totally dismiss the Bitcoin truthers. Your strategy of diligently buying into your 401(k) portfolio every two weeks, and seeing slow and steady growth is satisfying…until it isn’t.
Until that guy you follow on twitter reveals he made 695% on his all-in-on-Tesla portfolio in 2020. Or until your neighbor who’s been trying to get you to download Robinhood shows you he turned $4,000 into $40,000 buy trading GME in January.
Now, all the sudden you’re much less happy with your “slow and steady” approach.
Building wealth slowly is a good strategy
There will always be periods of wild speculation. But in between the bubbles, the investor committed to making steady deposits into a well-constructed, diversified portfolio will benefit from the simple magic of compound interest.
Compound interest may not be able to make you 10X your investment in a single month. But over the long run it can turn that “slow and steady” return into a impressive amount of growth. After all, it was Albert Einstein who called compound interest the “eighth wonder of the world”. And he was pretty smart.
This isn’t to say that your diversified portfolio is without risk. Of course not. It will experience drawdowns and is exposed to the risk of loss.
But it allows you the greatest probability of using compound interest and good discipline to build wealth slowly.
If you want to dip your toe in the water
Perhaps you're not seriously considering using most of your wealth to chase the next moonshot, but you would like to dip your toe in the water. That’s okay. If that’s you, in my opinion, here’s a good way to play it:
First, limit your initial exposure to no more than a certain percentage of your net worth. Something small. Or even a certain percentage of your investable assets.
Next, set a tolerance level. Decide in advance at what percentage of net worth (or investable assets) you’re comfortable allowing your exposure to grow to before you will trim your position.
Finally, decide in advance how much you will trim. Will you remove your initial contribution and leave everything else in so that you’re “just playing with house money”? Will you trim back to your initial exposure that you decided you were comfortable with? There’s more than one good option, but it’s important to think about in advance.
Doing these three things will allow you to participate in some upside—and satisfy your FOMO—without taking excessive risk.