Warren Buffett once famously said that smart investors should be “fearful when others are greedy, and greedy when others are fearful.” In other words, sensible investors should avoid putting money into trendy holdings merely because of their buzz. By the time the “next big thing” gets popularized, the profit margin is likely to be a small fraction of what it was for early investors.
Still, the fear of missing out—or FOMO—on a hot new investment opportunity is hard to ignore. It’s easy to wish that you could go back in time and buy a few shares of Google in 2004, or invest a few bucks in Bitcoin when it debuted in 2008. Smart investing means looking forward instead of the past. Sometimes it means ignoring the present, too—especially when FOMO might lead you to buy high and sell low.
On the other hand, there are plenty of situations where it makes sense to take advantage of a hot new opportunity. Here’s how to tell the difference between FOMO and the next smart portfolio move.
Trendy investments make for headline-grabbing stories of people who turned a few dollars into a small fortune. Bitcoin made waves in 2018 as it was the first cryptocurrency to enjoy mainstream success—and skyrocketing value too. By 2017, Bitcoin hit a historic high of $19,783, only to fall below $3,500 in November 2018.
As anyone who invested in Bitcoin at the height of its popularity can tell you, bubbles are bound to burst. Those who follow trends often expose themselves to significant risk. This is true of most trendy investments throughout the years, be they the Dutch Tulip Bubble of the 1630s or the U.S. housing bubble of 2006. All too often, today’s big thing is tomorrow’s has-been.
There’s a big difference between hopping on a bandwagon and finding an exciting new opportunity that’s gaining popularity. Alternative investments offer a range of options that can add significant value to your portfolio without being primed for a burst bubble down the line.
Take, for example, the world of farmland investing. Opportunities to invest in farmland combines elements of real estate investing and commodities trading—all while reducing exposure to common risks that come with both of them. Farmland investing is a relative newcomer to the alternatives space, but the value of farmland itself has a historically impressive record of maintaining value. And although the concept may be gaining popularity, it hasn’t fallen prey to becoming a trendy investment that’s more sizzle than steak.
It’s all too tempting to see stocks with skyrocketing growth and hop on board, even if the stock price is already a king’s ransom. After all, what’s the harm in investing several hundred dollars if there’s the potential for a significant payout? Who’s to say that a high-priced stock isn’t going to keep rising?
The answer depends on several factors, the most crucial being stock value. The value of a stock factors in broader considerations, such as market capitalization. A company with a market capitalization of $25 billion that trades at $50 a share is more valuable than one with $2 billion and a share price of $20. Judging whether or not to buy based on rising stock prices only looks at one factor at the expense of other indicators of overall company success.
Investments that don’t cause sticker shock when you execute a trade are much better for your portfolio in almost every scenario. A 4 percent return on 20 shares of a $10 stock creates the same value as a 4 percent return on one share of a $200 stock—but only the former makes it easier to diversify.
If outsized gains are your goal, and putting a larger amount of cash behind your investment to make it happen, there are smarter ways to invest. Take farmland investing, for example. With FarmTogether, you can start investing with as little as $10,000 and avail yourself to a host of opportunities to make market-beating returns on farmland investments. Plus, you’ll have a team of experienced investors on your side to help you pick the best opportunities for your needs.
Popular stocks may get the lion’s share of attention in the world of financial media, but popularity doesn’t always mean that every investor is primed to make a great return on their investment. In fact, by the time certain shares, sectors, or companies become a household name, they’re less likely to pay off for new investors.
The best way to create value and maximize returns is, as the maxim goes, to buy low and sell high. Buying into a stock or financial vehicle when its popularity is high means that you’re likely to pay more than those who invested earlier. That means you’re not only paying a premium, but you’re also less likely to reap the financial benefits enjoyed by earlier investors.
The apocryphal story of Joseph P. Kennedy (President John F. Kennedy’s father) pulling out of the market when his shoeshine boy talked about buying stocks has merit. Once everyone is talking about a new investment, the window of opportunity to make major gains has closed.
Remember that the most important attribute for your portfolio is growth. You’re building a set of investments that are designed to pay off, rather than look cool or chase profits from buzzworthy products. Unless you’re trading options and chasing short-term investments, there’s little to gain from building a portfolio of overvalued investments.
Instead, build a portfolio of products designed to provide steady long-term performance. Passive investments, be they conventional products like index funds or alternatives like farmland investing, offer a reliable rate of return that can boost your overall portfolio value. For example, farmland has averaged a 13.7 percent return from the 1970s to present. With this kind of foundation, you’ll give yourself more breathing room to go chase the next big thing.
Investing based on emotion is always a tricky proposition. It’s often difficult to even tell the difference between an emotion-driven decision versus a pragmatic one. The best way to make sure you’re investing with your mind instead of your heart is to do due diligence. What sounds too good to be true often is, and what goes up must come down. Some of the hottest investments at any given time may become oversaturated by the time they become a household name.
The only way to tell if the “next big thing” is here to stay is by doing your homework. That may also mean pairing with the right team of professionals who know the ins and outs of a hot new prospect. That’s where FarmTogether comes in: our team of seasoned professionals can help you understand farmland investing and guide you through the process of picking the right investment opportunities for your portfolio.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.