Warren Buffet has famously said about investing, "When you have the price, you don't have the
proof. And, when you have the proof, you
don't have the price." Well, who am
I to argue with famous Nebraskans? To
many this quote from the Oracle of Omaha speaks to the ever-present
relationship between risk and reward in the world of investing. As we
constantly emphasize at Rubicon Crypto, investing in digital assets,
blockchains and crypto currencies involves not just risk…but considerable
risk. We always caution that investors
should be prepared not just for volatility…but extreme volatility. Investing can often involve several
dimensions of risk that should be taken into consideration…broader market risk,
liquidity risk, regulatory risk, protocol and governance risk, custodial and
exchange risk, and, in the crypto world, geopolitical risks and the very
general "unanticipated risk" category should also come into consideration.
But, there is another important category of risk that is
particularly influential within the digital world that is rarely discussed that
I want to explore with you today:
Investor Risk Tolerance Split Personality Disorder. While I am obviously trying to inject a spot
of levity into the subject, this self-described phenomenon is one that I have
observed repeatedly over the course of my career in financial services. I
witnessed it first hand for a decade as a CFP in private practice…I witnessed
it as a young manager, and I would also witness it as a senior executive and
registered principal in the industry.
Simply put, time and time again, investors would almost invariably
become more risk tolerant whenever the markets were riding high on a bullish
wave, their normal financial sensibilities dulled by the portfolio gains of
soaring markets. And, I would ultimately
go on to watch those same investors undergo the aforementioned Risk Tolerance
Split Personality Disorder almost certainly whenever the financial news media
machine sensationalized a down market or especially after they viewed
consecutive account statements that showed their portfolios in retreat.
Bull markets are like a shot of liquid courage to
investors…the stronger the market rally, the more risk tolerant they inevitably
become. Not me you say? Okay, well here is a simple quiz from the
fine founders of Rubicon Crypto that might give you a clearer lens into just
how high your risk tolerance truthfully is.
It's a simple test, one that requires simple yes or no answers, and, of
course, it requires some honesty. Ah, I
should note that being able to answer all the questions on this quiz will also
give a rough guess of your approximate age!?!
Seriously, even if you are old enough to only answer the last question,
I am fairly sure you will get the point of this exercise.
Question 1: Did you
invest more money into the stock market on Tuesday October 20th
1987? Or, for that matter, anytime during the ensuing months of November and December
of 1987? Yes or No answers, please.
Question 2: Did you
invest more money into the market in days or weeks following the dot com bust
at the turn of this century? Again, yes or no.
Also, bonus points for investing in tech stocks by the way!
Question 3: Were you
buying into the equity markets during the height of the Great Recession that
began almost a dozen years ago?
Question 4: If you
were already an investor in crypto, did you rush to buy more of your favorite
cryptos when prices began to tumble from their all-time highs in June of this
year?
For those of you old enough to have honestly answered "yes"
to every question would certainly suggest that you have a high tolerance for
risk as well as an appreciation for the "long term" approach that we favor at
Rubicon (not to mention, you probably enjoy considerable wealth today!). And, if you answered "no" to most or all of
the questions: first, thanks for being
honest as I can confirm that you were far from being alone. More importantly,
you may have another strong and practical clue that would suggest that your
risk tolerance may not be quite as high as you thought.
Failure to know thyself is never helpful when assessing your
risk tolerance as an investor, by no means a new notion, but given the extreme
volatility and range of additional risks that are associated with investing in
digital assets and crypto currencies, the consequences can be exponential. If you are a frequent reader, would it
surprise you to learn that having rational exuberance is one of the best
antidotes for any form of Risk Tolerance Disorders, and, needless to say, one
we endorse and prescribe quite often here at Rubicon Crypto!
As always…whether or not you are crossing the digital divide
with Rubicon Crypto, please remember to do so with common sense…and with
Rational Exuberance.