17
Jan
2025

Don’t believe the hype: Why it’s easy to get distracted from your long-term financial plan

There are a few ways in which, as an investor, you may be tempted to distract yourself from your long-term plans.

The most common is to fall prey to the cycles of fear we are susceptible to when a major world crisis or market downturn arrives. In these moments, the fear of uncertainty can lead you to become short-term focused, often abandoning the discipline and patience that long-term success requires.

The other way you may distract yourself is by buying into the cycles of hype that appear when specific trends, sectors, or technologies become popular.

The companies best positioned to benefit from the publicity become the focus of investment speculators, providing the financial media an easy way to fill pages. Inevitably, a few stocks soar, with many investors worried about missing out.

Hype can change you from an investor into a speculator

On the surface, these cycles of hype appear harmless. They arrive with waves of positivity and excitement, which are emotions you may welcome, having grown tired of navigating one crisis after another.

While even the most disciplined investors can be forgiven for taking a punt with an amount of money they could afford to lose, these cycles become dangerous when you throw moderation out of the window. If you’re wagering substantial sums on short-term trends, you could be in danger of ruining your long-term plan.

You switch from being an investor to a speculator. You’ll be playing a short-term game that’s difficult to win. It’s usually the insiders and “early adopters” that make the real money, with the speculator buying at prices that already reflect the very high expectations of the market.

From this point, any disappointment in company earnings can lead to sharp declines as fickle investors move on to the next craze.

The skills and mindset you need to excel at this short-term game consistently are the opposite of those you need for long-term success.

There is little analysis when a hyped sector starts to decline in value

In the middle of a hype cycle, these words of caution may ring hollow for many. However, by studying recent hype cycles, it becomes clearer to see that the irrational exuberance you may feel from time to time might need to be suppressed if you’re seeking long-term prosperity.

While the arrival of a new cycle is celebrated with fanfare, not much analysis is done when sobriety has set in.

For example, in 2017 and 2018, five technology stocks, collectively known as FAANG (Facebook, Amazon, Apple, Netflix, and Google) received a lot of media attention for their significant outperformance against the market.

Many investors became convinced that these shares were the only ones they needed to own. However, from the end of 2021, new trends have arrived, and the talk switched from FAANG to the “Magnificent Seven” tech stocks.

This meant that many investors who got enticed were left high and dry with over-concentrated portfolios.

Artificial Intelligence is driving the latest hype

We are currently going through the Artificial Intelligence (Al) hype cycle, with the manufacturer of graphics processing units, Nvidia, receiving the most investor attention.

However, while the Financial Times reported that the company’s value had doubled in the year up to June 2024, the same article confirmed that other AI-related tech stocks had fallen in value.

As we’ve highlighted in this article, it’s important to understand that the world’s attention can shift just as quickly as it arrived, and there’s no guarantee that investors will be the ones to benefit.

If you’re currently invested in a diversified mix of the right asset classes, no new hype cycle should require you to make significant portfolio changes.

As the financial writer Morgan Housel, who I have written about here before, so elegantly states, “The most important question to answer as an investor is not, ‘How can I earn the highest returns?’ It’s, ‘What are the best returns I can sustain for the longest period of time?’”.

As I will often say in these articles, my job is to remind you what’s always worked, not to talk you into the strategies that, for a while, may be working at the moment.

Get in touch

If you’d like to arrange to talk about your financial planning and investment strategy, you can call me on 07769 156 250.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.