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.