Addiction: Asset Class
By: Jamie B. Ostrander
In the collective 90+ years of professional experience our WealthCoach team has witnessed investors suffering from asset class addiction. In some cases, an investor can find success early in a single asset class, and it spoils their appetite for an efficient return and the ability to be proactive in seeking opportunities in diverse capital markets.
Asset classes, for our purposes here, are represented by publicly traded companies or stock, various bond portfolios, cash, precious metals and real estate. Each asset class is measurable in its ability to deliver a return for a quantifiable amount of risk. Even though we know how these various investment classes can deliver return for a certain amount of risk, it does not stop asset class addiction, and in some cases can cause cravings.
Concentrated time, effort and capital is the means of creating wealth, but in order to protect and preserve that wealth, there must be a transition from that concentration to diversification. For an addict, this transition can be very hard to accomplish, and in certain cases, impossible!
Some investors become accustomed to generating a return on their time or capital through real estate investing. Real estate can be a very good investment, but it certainly does not have the return opportunity of small cap international stocks historically, or the capital preservation of ultra-short term high quality bonds. What it offers investors that have found success is comfort; they are familiar with it and find it hard to compare the other asset classes against their preferred asset class objectively. Real estate investors can also fall victim to the tangible fallacy, that is to say, if you can touch it, feel it and walk through it, it is somehow more real than stock ownership in a company (that very likely own that same tangible property).
Day traders enjoy the high risk of daily testing their single guess against a market of billions of trades per day. The day trader can fall victim to the self-attribution bias, which refers to an individual’s tendency to attribute success to their own personal skill and failure to factors beyond their control. If they do find success over a long period of time, it is primarily attributable to the capital markets.
This leads to the reactive as opposed to proactive investor. If you have started with why you invest instead of what you should invest in, you can afford to be proactive and expose yourself to a diversified pool of investments, knowing that you are exposed according to your own risk tolerance to achieve your goals. You must be reactive as an asset class addict, there will be better times to invest than others, and you must wait for the next “hot” opportunity to sell you on its merit.
What often changes for the single asset class investor over time is the “why”. Once enough wealth has been created through that concentration, the “why” turns from growth of capital to preservation. Diversification becomes imperative, but now the addict cannot resist their next high. If you begin with why instead of what, you enable your money to grow at a much more predictable rate, while enjoying the peace of mind that comes from diversifying your risk to your customized risk profile.
Did this ring true for you, or sound like someone you know? Find out what it might be like to have a personal WealthCoach by your side, helping you make smart decisions about your money in the context of your own personal situation, and helping you see other possible avenues of investment. Call our wealth services firm in Satellite Beach, FL – Melbourne/Brevard area at (321) 773-7773 to schedule your complimentary initial consultation.
You should not assume that any discussion or information contained in this publication serves as the receipt of, or as a substitute for, personalized investment advice from FirstWave Financial. A copy of the FirstWave’s current written disclosure statement discussing our advisory services and fees is available upon request.