What Investors Need Most When Greed Blinds

With global equities up 92.6% since March 2020, many investors are seeing green everywhere they look—and not just among blue-chip stocks.^[i] A parade of faddish investments have cycled through headlines, stoking a whole lot of FOMO—fear of missing out—in the process. Meme stocks. Cryptocurrencies. Non-fungible tokens (NFTs). As a result, many seem to be wondering if they should dive in to the Next Hot Area, snapping up a huge stake in Reddit’s next favorite meme stock or taking a flyer on a big bounce back in dogecoin (et al). Those impulses signal greed may be afoot—an emotion critical to resist late in a bull market. In my view, this is where an adviser can add tremendous value for clients—so long as they don’t simply say what clients want to hear. An adviser should show their client the troubles with giving into greed, not indulge every whim. In other words, when greed lurks, you need a true adviser—not a Yes Man.

Greed is usually easier to identify in others than in ourselves, so here is a hypothetical conversation between a client, Jim, and his adviser:

Jim: My neighbor told me about a new crypto coin developed by her nephew’s college roommate’s company. We have some spare cash. What do you think about taking a flyer on this coin? Can’t hurt, right?

Adviser: Jim, you said on our last call that cash was for your granddaughter. Remember you wanted to help her with some college expenses? She graduates next year, so we agreed holding that cash right now makes sense.

Jim: I know, but this seems like a chance to get in on the ground floor, and my neighbor said I could quadruple my investment in months—well before my granddaughter graduates. We already missed out on bitcoin. Plus, you’re always telling me about the importance of diversification. Wouldn’t this qualify?

At this point, the adviser is at a crossroads. Do they simply give in to Jim’s request? Or do they push back and have a tough conversation?

Now, the correct answer may seem obvious: The adviser should identify Jim’s greedy behavior and address it. Jim is paying his financial adviser to, well, advise him, not to simply agree with him. In my view, that means going beyond just listening and answering questions. It also means engaging and, occasionally, challenging ideas—the latter of which may be uncomfortable for both parties. But an adviser’s role is more than being an expert on financial issues. It also involves being a clear-eyed counselor who recognizes the perils of acting emotionally in investing—and how doing so could set back their client’s progress toward their long-term investment goals. A good financial adviser isn’t afraid to be a sobering voice when the client wants to party hard, just as they should deliver steady, calm counsel when volatility stokes fear.

However, just because an adviser should do that doesn’t mean they will. According to an annual survey of over 500 financial advisers conducted in March this year, 14% of respondents currently use or recommend cryptocurrencies with their clients—up from less than 1% in 2020. ^[ii] Moreover, 26% expect to increase their use or recommendation of cryptocurrencies over the next 12 months, up from 0% in last year’s survey.^[iii]

What changed? Nothing with cryptocurrencies themselves—they have been super volatile throughout their short history. But broader interest in cryptos has swelled alongside their prices—and unsurprisingly, some investors are comfortable with that kind of positive volatility. Bitcoin, for example, skyrocketed 103% in Q1 this year and 815%(!) between March 2020—the last time the survey was taken—and March 2021.^[iv] The corresponding jump in advisers apparently ok recommending cryptos is also no shock. In my view, it suggests at least some are taking the path of least resistance and acquiescing to their clients—even though the fundamental reasons to own crypto are still dubious.

But while it is easy to hold something going to the moon, how comfortable are clients—and advisers—when it crashes to earth? Negative volatility has a way of changing minds and moods quickly. Has bitcoin’s -39% plunge between March and today altered some clients and advisers’ theses to own?^[v] If it has, that implies a poor investment process to me. Now don’t get it twisted: I am not inherently against cryptocurrencies. But I am against chasing heat—especially when a financial adviser, tacitly or explicitly, encourages it.

Going back to our aforementioned hypothetical conversation, it probably wouldn’t be helpful if the financial adviser simply told Jim he was being greedy—name-calling will get you nowhere. Instead, as we aim to do here on MarketMinder, the financial adviser should show, not tell, Jim the perils of giving into greed. For example, they could discuss the motivations behind the changes. If Jim responds with a version of FOMO—e.g., citing recent hot returns or comparing performance to others—the adviser should then ask whether making those moves are consistent with his specific investment goals. Chances are they aren’t. Based on Fisher Investments’ vast experience, successful investing depends more on staying disciplined with a long-term plan than finding highflyers or the Next Big Investing Thing.

The adviser should also discuss the new risks Jim may unknowingly be taking by deviating from his plan. This is an opportunity to educate using recent history and tangible terms. For example, bitcoin’s volatility isn’t new—it fell by -74% in 2018.^[vi] The adviser could ask Jim to imagine how he would feel if his portfolio tumbled from $1,000,000 to $260,000—and how that would impact his ability to fund retirement or other goals. Moreover, if Jim says his goals changed, a much more in-depth discussion is necessary, in my view. New goals may require significant portfolio changes that can’t be addressed by simply buying whatever is hot at the moment.

Now, if a client like our hypothetical Jim still desires to make a change, that is his prerogative. It is his hypothetical money. But ideally, he should make that decision only after a fully informed discussion with his financial adviser. That conversation should challenge Jim’s ideas—not parrot them. A financial adviser who simply kowtows to their client’s whims without educating and actually counselling them is a liability, not an asset, in my view.