5 Ways to Make Sane Investments When Everyone Else Is Crazy

When grandmas and Uber drivers are boasting about profiting on Bitcoin and SPACs, don’t get sucked in to the hype. Here’s how to make sure your investments are based on reality.

A skydiver goes wild.
(Image credit: Getty Images)

The other day I received a call from a friend who wanted to know the best way to purchase a Non-Fungible Token (NFT). NFTs are one of the trendiest current investment themes. They are essentially a unit of data on blockchain that represents a unique digital item, such as digital art, audio and video files.

While it was a bit strange to receive a question about such an opaque area of the market from my friend, a social worker at an elementary school, I wasn’t overly surprised. The week before, an 80-year-old grandmother told me that she made a mint in Bitcoin, and my Uber driver told me he was considering an investment in a Special Purpose Acquisition Company (SPAC). These comments, along with the fact that every other person seems to be day trading to supplement their income, illustrate clear frothiness in the market.

Some of these investing novices are actually making a lot of money from their imprudent decisions. Their initial success and eye-popping performance may lead many to succumb to the error of “outcome bias.” The greatest concern is their being blind to the fact that they are missing one of the most important elements of successful investing, namely having a sensible process in place.

“Outcome bias” arises when a decision is based on the outcome of previous events, without regard to how the past events developed. Many novice investors may conclude that the quality of the outcome (i.e., high returns) confirms that they have a knack for picking winning investments. In many cases, this couldn’t be further from the truth. Over the short-term, one can have great returns simply by getting lucky. Conversely, one can have bad short-term returns with a good process that will still allow you to achieve your financial goals. Going through a slump with mediocre performance does not necessarily mean that your strategy is ineffective.

As the markets continue to trade near all-time highs, and as speculative investment behavior is more prevalent with the masses, it’s important to take a step back to assess your own process for making investment decisions. The considerations below can serve as a good bellwether to determine if you have a prudent strategy in place or if you are taking too much risk within your portfolio.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Jonathan I. Shenkman
Associate Director - Investments, Oppenheimer and Co. Inc.

Jonathan Shenkman is a financial adviser, portfolio manager and the founder of the Shenkman Private Client Group of Oppenheimer & Co. Inc. He is experienced in developing creative strategies that allow his clients to achieve their retirement, estate and philanthropic objectives.