Market speculation is seemingly everywhere. From new SPACs being issued, to the prevalence of Reddit stocks such as GameStop to the popularity of electric vehicle stocks and the rise of cryptocurrency – speculation is alive and well in the markets today.
“Mania” is a good word to describe the energy surrounding these types of investments. Dramatic daily swings are the new normal in these holdings. Hollywood elites and business moguls are attaching their names to crypto and the latest SPAC investments.
The top mania investment areas are electric vehicles, cryptocurrency, Reddit stocks, space, SPACs, precious metals and pot stocks. The dictionary definition of mania describes “excessive or unreasonable enthusiasm.” That seems about right. The result has been a meteoric rise in value not tied to business fundamentals but tied to hype, expectations or projections.
Investors looking to boost performance often wonder how much exposure to these types of investments should they have. With strong appreciation in some of the holdings, it is tempting to get into the game. Here are our top eight tips for mania investing.
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1. Admit that it is a mania
Have some honest reflection about the investment environment you are in. Mania investing can be fun, it can be thrilling and, ultimately, it can be painful. But mania investing is not your conventional long-term investing strategy. Admit you are being swept up in a mania and acknowledge what that might mean regarding your tactics. It’s impossible to explain to yourself or your friends the fundamentals of a company with no earnings, so stop trying to make sense of it. It is a mania, not an investment based on fundamentals.
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2. Have an exit strategy & set a price target
How far are you willing to watch your investment drop before you pull out? Set a price target and stick to it. Some of the biggest mistakes happen with investors who fall in love with a company or a product and hold it while closing their eyes. Mania investments are not typically long-term plays, and you must plan for how much risk you are willing to take. Set a target to get out and limit your downside exposure.
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3. Limit your overall portfolio exposure
If you are going to be a mania investor, maybe you limit your exposure to 3%, 5% or 10% of your total portfolio. Understand it is the high-risk portion of your portfolio and do not allocate more than you are willing to lose. The older you are and the closer to retirement, the less you can afford to lose. The younger you are, the more you might be willing to allocate to more aggressive strategies.
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4. Diversify your manias
Maybe you like cryptocurrency — go ahead and invest in it, but buy into three different types, instead of just one, to diversify. Maybe you like electric vehicles. If so, consider adding some exposure to space or precious metals as well. Even in your mania investing, you do not want to concentrate all that allocation to just one mania strategy. Diversification can help reduce risk even in a risky space. Although, be careful of too much diversification. In a world like electric vehicles, there is a possibility of there being few winners and many losers.
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5. Understand performance in context
The S&P 500 10-year average over the past 100 years is around a 10% return per year. Warren Buffett has averaged about 15% per year. If your mania investments have made 100% in a year, understand how rare that is and that the odds of duplicating that performance year after year are incredibly remote. Part of good investment performance is not just making money in good times, but also weathering losses during challenging times.
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5. Know the difference between investing and speculating
Investing for the long term carries its own set of disciplines and rules and expectations. Mania investing is more akin to speculating or even gambling. It often has dramatic movements in price over a short period of time. It might include hype in the media, memes on social networks and inexperienced people giving investment advice. Be careful and realize speculating is a high-risk game — it is not the same as sound investment on fundamentals.
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6. Take some winnings off the table
Maybe you own one of the stock names that have doubled or tripled in value over the past year. Consider selling some of the holdings and locking in your gains. Maybe reduce your exposure by 50%. Keep some of the holdings a bit longer, but diversify into something more stable or consistent. Setting a price target on the upside can be just as important as setting one on the downside.
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7. Do not gamble the farm
A smart gambler, if they go to Vegas, will set their own personal limit on what they are willing to lose. Whether that is $100, or $10,000 — set a limit when it comes to mania investing. Also, do not raid all your retirement money on a whim to chase manias. While a portion could make sense, the lion’s share of your retirement should be focused on fundamental investment strategies that are consistent. Pulling all your retirement money to buy into different manias would likely be a crazy idea, just like putting your house keys in the pot of a poker table would be ill advised.
Investing in some of these sexy stocks and industries has appeal, and there is money to be made. But there is also money to be lost, and it is important to have a rule set for investing even if you are investing in mania stocks. Finally, know how risk taking can fit in your overall financial plan and realize that the risk you are willing to tolerate is likely to be different from someone else.
Investing carries an inherent element of risk, and it is possible to lose principal and interest when investing in securities. Strategies are used to assist in the management of your account. Even with these strategies applied to the account, it is possible to lose money. No strategy can guarantee a profit or prevent against a loss. There may be times when the strategy switches between equities or fixed income at an inopportune time, causing the account to forfeit potential gains.
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