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Financial Fads

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Are These Fads A Dream…Or A Nightmare?

The thing about the flavor of the month is that the month always ends and a new flavor emerges.  Same goes for the “Best of the Year” – once your year is up you no longer hold the distinction of being The Best…unless you regain your title.  While the development of financial fads is certainly not a new concept, the turnover rate seems to have increased dramatically in recent years.  So with the next big thing coming tomorrow – is sinking your teeth into today’s hot fad a mistake or a worthwhile risk?

Early Fads (Research Time For Scott)

The idea of fluctuating value of shares is not something that was developed in the modern world.  Thousands of years ago in the Roman Republic (before the Roman Empire) workers were given “shares” in exchange for building temples.  Those shares were a reflection of the value of the Republic.  The value of certain goods has been affected by the concept of supply and demand for nearly the same amount of time.  The concept of supply and demand reflecting price was developed in India, well over a thousand years ago.  While it would be grossly inaccurate to refer to the Roman Republic and early Indian texts as fads, the ideas are the there.

Another borderline fad would be war bonds.  The idea of issuing government bonds to pay for military requirements was first exercised in England in the 17th Century.  I say borderline because war bonds are specifically sold during war and I think referring to war as a fad would be tasteless.  The other main difference is the focus of war bonds is to support your country, not to get rich.

More Traditional Fads

Unlike shares in the Roman Republic, or bonds to support the troops overseas – a more traditional definition of a financial fad would be something that gets the general public hyped up to throw money at.  The get rich quick, maximum payout for minimal effort.  In my lifetime I have witnessed a few of these starting with the tech boom in the late 80’s early 90’s.  This was well before I was old enough to be involved, but I was aware of what was happening.

In writing this post I was surprised to learn how long ago these types of fads started.  One of the first traditional financial fads was Tulip Mania.  This was in the 17th Century in the Dutch Republic.  The tulip was the hot new thing in Europe and demand was staggering.  Prices skyrocketed and it seemed like the flower was a real winner.  The danger behind this fad, like any bubble is that it eventually will burst.  Financial value is more based on perception of value than it is actual value.  Your house has a value of $200,000 – but based on the perception of real estate value you could sell for $500,000.  It can also sell for $100,000 if the market is at a low point.

Modern Day Fads

In my adult life (post dot com bubble), there have been a few financial fads.  Not all of them have been about booming investments.  The main three that have dominated the headlines are direct banking (ie online only), robo-advisors and most recently cryptocurrency.

Direct Banking

I would categorize direct banking as being on the dream side as opposed to the nightmare.  The concept of securing a higher interest rate on my savings because my money doesn’t need to fund a network of physical branches is fantastic.  I understand the reluctance of some to rely on a bank with no faces – but how much influence does the modern bank teller really have on your money?  Are your savings really safer going into a branch than doing an online transfer?  In reality they are pretty much the exact same thing – the only difference is that a bank teller is pushing the buttons instead of you.

The fad aspect is that the big “brick and mortar” banks have reputation and security that is difficult to beat when it comes to securing your money. The bank structure in Canada is different than in the US where we have 5 major banks that are nationwide.  The much smaller direct banking solutions have hot streaks due to promotional interest rates and ad campaigns.  A parallel to this would be the Canadian telecom industry.  A company called Freedom Mobile (owned by Shaw Communications) suddenly became hot when they advertised a phone plan with 10GB of data for only $50/month.  The big 3 (Rogers, Bell, Telus) answered with special promotional plans for the same plan but for $60/month.  Freedom suffered significant loss of contracts because people flocked to the security of the big 3.

Robo-Advisors

I see robo-advisors as being more on the dream side as well – although I think they can present an issue with becoming financially educated in some cases.  Robo-advisors operate using math – removing the human element to financial decisions.  If I were to ask you to divide 267 by 13 – you would likely use the calculator on your phone because the answer would be faster and likely more accurate.  What if I asked you what the remainder would be if you divided 267 by 13 – now we are talking about long division!

I think it is important to learn how to do division yourself, but in all honesty I’ll still break out the phone if someone wants me to divide using big numbers.  Thinking about it, robo-advisors are kind of an anti-fad fad.  Financial fads are driven more by human decisions than mathematics – so having the fad actually be something that uses math is a bit of a paradox. People want help with their money, but removing human error makes robo-investing very appealing.

Cryptocurrency

The latest and greatest financial fad is the boom of cryptocurrency.  The concept of virtual currency has been around for a while now but as a financial fad it is more current.  There is a big difference between electronic currency and cryptocurrency.  Chances are the majority of your money is represented digitally, I can’t imagine that many people have most of their money in stacks of bills sitting in their closet.

What makes cryptocurrency different is that it is anonymous and untraceable.  This, in my opinion makes this fad more of a nightmare than a dream.  For one thing, the anonymity of it makes it an ideal vessel for illegal activities and funding of terrorism.  This presents more of a moral dilemma than a financial one, but as I wrote about in the past morals do influence my financial decisions.

Cryptocurrency is also a financial nightmare.  The unpredictability and speed of market value changes can take you from multi-millionaire to bankrupt in an instant.  Look at the most widely recognized cryptocurrency, bitcoin.  In the week before I wrote this post , the value of a bitcoin dropped by almost 20%.  During the time it has taken me to write this post the value dropped by more than 5%.  This can be a disaster when making the decision to buy or sell.  By the time the transaction goes through you could win or lose huge amounts of money.  Imagine the stock market boom and crash of the 1920’s happening inside of an hour.  That is the reality of cryptocurrency.

Following Tradition or Giving Into Fads

There is a lot to be gained by giving into fads.  With some good timing you can make a ton of money off of “here today, gone tomorrow” ideas.  As long as you have the instincts to make work.  Self-control to get in near the bottom and leave near the top is also essential.  It can certainly prosperous to get in on the action.  I already take advantage of the direct banking fad, although percentage wise I rely much more on the big banks to hold my assets.

I’m not opposed to getting involved with a robo-advisor, however I actually get a kick out of making the decisions myself as a DIY investor.  I also invest quite heavily in ETFs (Exchange Traded Funds) which is a technique often used by robo-advisors so the financial value isn’t necessarily there.  My struggle with cryptocurrency on a moral level – and financially I would never bet the house on it.  I might make the decision to throw a small amount of money at it as a gamble.  Just like gambling, I won’t go to the table with what I can’t afford to lose and I have to know when to walk away – up or down.

Have you ever bought into a financial fad – was it a dream or a nightmare?

Scott

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