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Dear Pete,
I continue to be amazed at the type of returns people are getting in the investment markets, specifically Bitcoin and all of the GameStop-like stocks that people on Reddit were promoting. My brother, who knows next to nothing about investing, doubled his $10,000 recently, and now I’m feeling like I’m missing a golden opportunity to win some easy money. What do you think about all the recent craziness?
—Mark, Westfield
When I was in college, a friend of mine who took a film class persuaded a group of us to watch a legendary foreign film without subtitles. He swore up and down the only way the film could be appreciated was in its original language, one that none of us spoke except our one friend who could ask for directions to the bathroom in that particular language. For more than two hours, we sat in peer-pressure-generated silence praying for a love scene, violence or some other form of a payoff. Never happened. The film simply wasn’t for us.
That’s how I feel about cryptocurrency and all the stocks that caught fire thanks to Reddit chat rooms. Yes, I’m sure some people really enjoyed it, but it’s a hard pass for me.
Mark, if you’ve read this column before, you know my reality. I’m a bit of a buzzkill—a fuddy duddy, if you will. I’m okay with that, and I also think that’s why you emailed me. You needed someone to advocate for the utility in not taking trend-driven risks. Well, here I am.
For context, just so you know exactly what you’re dealing with here, I don’t like to gamble. I don’t like Vegas-style card or dice games, and I don’t bet on sports, other than the $20 I lose annually to my high school friends’ fantasy football league. Some people love the thrill and rush that comes with risking their wager; I don’t. Yet, I understand the appeal for others. It kinda makes sense.
What doesn’t make sense to me is investing with a gambler’s mentality. My investment strategy was created using my financial goals, risk tolerance and time horizon. Randomly supercharging my investment strategy with sudden risk is reckless. The whole point of having an investment strategy is working the strategy. I will more or less have the exact amount of money I’m planning on having at more or less the exact time I plan on having that money. Seriously. It’s a forgone conclusion.
When people don’t take the time to develop an investment strategy—generally because they don’t want to see how far behind they are—they’re more likely to adopt an “anything goes” philosophy. Your brother was able to double his money because he likely doesn’t have an investment strategy that will lead to retirement success. Getting lucky by doubling your money isn’t a sustainable strategy. Is it thrilling? Sure. Is it helpful? Actually, no. Because the more he convinces himself that he understands something he doesn’t, the worse his financial life will get.
I’m happy for everyone who has made money on cryptocurrency and/or the investments propped up by anonymous Reddit posters. I’m also happy for surfers who survive chance encounters with sharks.
Ask yourself: What’s a better, more sustainable and repeatable investment philosophy—getting really lucky several times, or excluding luck and employing math? I’ll take math all day.
And lest you believe we’re splitting hairs over your brother’s risk tolerance versus my risk tolerance, we’re not. A high risk tolerance still requires suitable investments. In fact, I have a high investment risk tolerance, but I leverage it by only buying suitable investments. To me, this all goes back to knowing the exact rate of return you need to achieve throughout your working career to accomplish your retirement goal. I’ve done the math, and I need just under an 8% rate of return. You know what ruins a beautiful plan? Needing 8% but going for 40% and losing 20%.
Securing your financial future is not the place where you want to find your thrills. Seek your rush elsewhere. Go to a popular restaurant without getting reservations, run your car out of gas on purpose or find a date to your company’s holiday party on a dating app. But math is the greatest thing on the earth for a reason. It can help you solve nearly any problem. Don’t abandon it because it’s boring.•
__________
Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.
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