Bitcoin. Now that’s a buzz word that recently travelled around the globe quicker than a Kim Kardashian selfie. Without even taking the time to Google the words “crypto currency investment risks” every man and his dog had been piling into the “investment opportunity of a lifetime”. Why? Because failing to cash in would be the financial crime of the century, right? Wrong. Investment fads aren’t something new. History will show us hundreds of examples of “get rich quick schemes” that didn’t actually play out the way the pundits had anticipated. Need a local example of people getting caught up in the hype? Back in the nineties Dimension Data was the flavour of the month and just about every South African who had some money in his pocket jumped in head first. Then the company’s share price crashed on the back of the dot.com bubble and investors lost everything.
In some respects you can’t even blame people for taking risky investment decisions. Had you been caught up in the hype, there is a good chance you would have also emptied your piggy bank. The allure of “easy money” is tough to combat with common sense, isn’t it?
Why do people invest in something they know very little about? It’s because we are all swayed by opinion and sentiment.
It forms our views on health, politics, fashion and even our hard-earned money. If the vast majority of people are saying it’s a sure thing, it simply has to be!
Back in 1886 they found Gold on the Witwatersrand, and thousands upon thousands of “would be miners” looking to seek their fortune, flocked to what we now know as Johannesburg. Some managed to cash in, the majority didn’t.
Fast forward 130 odd years and the allure of real gold has been replaced by the allure of crypto gold.
Now before we get bashed over the head about calling Bitcoin a “bad investment”, let’s set the record straight. Any investment decision you make without due diligence is a bad decision. Bitcoin might prove to be a great long-term investment for someone who understands the risks. In the same breath it might be the worst money decision you could ever make if you don’t know what you are getting into.
The fact of the matter is that any investment that promises to give you double-digit returns, over a short period of time, is either a Ponzi scheme or an investment that is so high-risk you probably don’t have the appetite for it (as much as you believe you do).
When it comes to investing money, you need to stay as far away as you possible can from any braai chit-chat or office water cooler rhetoric. Just because your boss is bragging about a particular investment he has made, which is going to allow him to put his feet up in Mauritius by the end of the year, doesn’t mean he is right or that you should even take notice.
This is why – as an investor you fall into one of these broad investor categories. It’s important that you know your “money personality” because it will give you a sense of the type of investments you should be looking into (and the type of stuff you should be avoiding).
- The conservative investor
Nobody wants to lose money when they invest, but we all know investments come with a degree of risk and reward. If you take more risk, you can earn more money, but you need to be prepared for a little downside. Conservative investors by nature are risk averse. That means they don’t want to take too many risks with their money. If that sounds like you, then taking a punt on high risk investments like Bitcoin is going to leave you having sleepless nights. Conservative investors should be looking at cash and bonds as investment options.
- The prudent investor
The prudent investor is a rung up on the investment risk ladder. Unlike a conservative investor, a prudent investor is comfortable with a little more risk but capital preservation is still key to their investment strategy. In most cases a prudent investor will suck up a few of the market ups and downs to gain a bit more than a cash investment will offer over the long-term.
- The moderate investor
The moderate investor is looking for income and growth and is up for a little more risk than the prudent investor. The typical investment portfolio of the moderate investor will have less than 50% in equity (stocks) and the balance in cash and bonds.
- The venturesome investor
The venturesome investor is looking for long-term growth and will be looking at an investment portfolio of growth stocks. They understand the nature of investing in the stock market and will be prepared to ride out the ups and downs to achieve a return that is higher than a market-related gain.
- The aggressive investor
This type of investor is right at the end of the risk scale. If you decided to take every cent you had and invest it in a brand new crypto currency that launched on the weekend, it’s safe to say you are an “aggressive” investor looking for maximum returns in the shortest possible time period.
You can’t change who you are at the core. If you are conservative by nature and you like to take a pragmatic approach to everything, you will probably find that’s how you deal with your money. If you are a gung-ho type of guy or gal who likes to live life on the edge and find a thrill in the ups and downs of life, you probably have the same type of view with your cash.
And while we are on the subject of proverbs, here is one to finish off this post.
‘Knowing yourself is the beginning of all wisdom’ – Aristotle
When you do, you will find it less tempting to be swayed by all the hype.
Until next time.
The Wise About Life Team