By Ryan Dolan
The central feature of my relationship with clients is just that - relational. How can you hope to effect positive financial change in someone’s life unless you’ve invested the time and effort to know understand them? How can you prevent them from falling victim to the constant procession of often psychologically-driven misjudgments that bedevil investors, large and small? Simple - you can’t and won’t.
You must have a process that helps people get a clear picture of their “why.” Most people have, at best, a hazy vision of what is truly important to them, and as such, their financial actions don’t align with their values and long-term vision. The allure of the now takes precedence over a bigger, more substantial need that is years or decades in the future.
Once we start to understand the mission, we unpack the client’s biography-personally, professionally and financially. We need to understand the external narratives they’ve accrued over time. We give particular focus to the e traits, thoughts and behaviors that haven’t served them. A common source of financial misadventures? When envy, FOMO and “shiny new object” syndrome work together to drive bad financial behavior.
When ambitious people don’t understand their mission, they end up simply chasing more: more money, more vacations, more houses. They view life as a high stakes zero-sum game. When someone is doing better than them financially (and there always will be), it eats away at their self-worth. Conversely, they feel smug superiority when they are better off that others. This is a brittle foundation to build on, and what’s worse-you are miserable throughout the journey.
I often tell clients to think of me as an investment insurance policy. I am there to stand in the way of the myriad financial and investment mistakes that present themselves along their road, no matter how intelligent. It’s been said that investing is the cross section of math and psychology. When markets get highly emotional, the risk of making a serious financial gaffe go up sharply. We are in one of those times today, in my opinion.
The latest in a long line of examples of investment FOMO meeting “shiny new object” syndrome is crypto. Here is a piece I wrote for clients in December.
Given the increasing frequency of client questions, I thought I would give my perspective on the highly-charged topic of crypto.
Investing demands you balance two traits, which can seem at odds with each other. First, you need to be open-minded. The world, business and markets change and evolve-you cannot get locked in static, inflexible thinking. So you absolutely need to be adaptable and open to change.
On the other hand, you do need core investment beliefs that are based on unchanging principles (anchoring investments to goals, patience, having a long-term orientation, balancing greed and fear, being diversified, keeping an eye on valuations, tax efficiency, etc). It takes some time and experience to build these-but it’s critical. It’s why I reinforce them frequently with clients. If not, you risk being unanchored-constantly flitting from one investment style to the next-always chasing what’s hot. Occasionally, markets get deeply distorted and unhinged from reality. While it continues, every fad seems to be the “next big thing.” We don’t want to fall prey to that.
With crypto, I am open-minded to the fundamental need. Throughout history, nations have abused their currency monopoly. From the leaders of ancient Rome clipping gold coins and melting them down to create new ones to today’s digital money printing by central banks, governments have historically resorted to currency debasement and price inflation (largely to reduce government debt). Since the financial crisis, governments-particularly the US- have been suppressing interest rates, printing massive amounts of currency, and building up huge debt and deficits. Thus, the idea of having an independent sound currency, not controlled by any government, is clearly very alluring.
On the other hand, while the need is apparent, it’s unclear to me that crypto will be the solution. First, even in the event that crypto does reach widespread adoption, there is the very real risk that an investor picks the wrong currency. This is akin to investors in the early automotive industry. Let’s say you had perfect foresight in the early 1900s that cars would reach massive, global adoption and scale. Despite that, it would have been very difficult to profit from that insight. There were hundreds of automakers, and the overwhelming majority went out of business. Even if you paired perfect foresight with the right stock selection-picking the industry’s eventual winners-you would have generated pedestrian long-term returns. While Bitcoin seems to have achieved dominance, the proliferation and success of other currencies is a concern.
There is also the risk that countries will simply outlaw crypto. Governments are slow-moving, particularly when it comes to new innovations and technology. But regulation eventually comes. Ask yourself, why would governments willingly give up their currency monopoly, particularly now? The governments of China and the US can’t agree on much, but hostility to crypto is one area of alignment. Several times in US history the federal government made it illegal for US citizens to own gold-typically at times when it would have been most beneficial for an investor to hold it. Why would crypto be any different? I’ve heard the arguments why it would be challenging to outlaw crypto: it is largely untraceable (thereby impeding enforcement), and that for a ban to be potent it would need to be globally coordinated. I get the arguments. Nevertheless this is an overhanging, existential risk.
Finally, there’s a risk-however small- that crypto turns out to be a colossal bust or fraud that goes down in the annals of financial history, much like the Dutch tulip bulb mania in the 1600s. For some reason, still unclear, the typically sober Dutch lost their collective minds and bid up the prices on coveted tulip bulbs to unprecedented heights-only to have the market completely collapse when sobriety returned. In a time of rampant investor speculation, if there was a time when investors would be open to an untested new asset class-this would be it. With regards to fraud, in a world of intensifying and sophisticated cyber crime, much of it led by state actors, can you be 100% certain that crypto isn’t a fraud or ponzi scheme? Maybe you can, but I can’t.
At the end of the day, I won’t be buying crypto for clients anytime soon, nor will I be recommending that clients do so. Nevertheless, should clients feel an intense desire to get in on the action, let’s have a conversation. I’ve heard a reasonable argument that for people who are true believers, having an appropriately sized, properly diversified allocation to crypto can make sense. There is a bit of a lottery ticket approach involved. If crypto does in fact reach long-term adoption and starts to disintermediate government currencies, the winning currency would likely go up many multiples from here. But clients should go in with eyes wide open-it could also very easily be a zero. Either way, the position should be small.
Caveat emptor.
Frankly, most of you aren’t going to invest the time and energy to head out into financial deep water. You will be too “busy” to define your why and chart a deeply congruent and rewarding financial path. But for the minority who are, let’s have a conversation to see if an advisory relationship with Dolan Partners makes sense for you.
www.dolanpartners.com