A raging bull market and low interest rates have got people to get creative with their money. I often hear animated discussions about international investing in NFT, P2P, invoice discounting, fractional real estate, covered bonds, crypto, etc. As long as you are aware of the risks associated, and allocations for core goals are done properly, you can bet some money on new, happening products. Here is what you need to keep in mind with these fun investments.
Ask yourself why you want to make these investments. Is it for fun, or out of curiosity, or because everybody is doing it, or FOMO (fear of missing out), or TINA (there is no alternative)? Of course, you can only do these investments if you are saving sufficiently for financial goals and have financial security. Unfortunately, I see investors who haven’t even paid off loans, or started saving for goals, allocating capital to fun investments.
Invest only in regulated products: Cryptocurrency, or invoice discounting is not regulated. Regulation ensures some risk mitigation such as an independent oversight and grievance redressal for investors. Check the pedigree and experience of the manufacturer. Evaluate their privacy policy and processes such as whether the funds are held in a pool account.
Do not invest for instant gratification: Claims of quick wealth from these instruments, made on social media, show only one side of the journey. Seldom does one see videos from influencers when there is a downward trend.
Limit these investments to 5% of the portfolio and be ready to lose the capital. Ring fence it from the rest of the portfolio so that losses do not affect your financial goals. While trending markets may make you feel you know it all, these are high-risk investments.
Having got into it, follow the right information sources. Study the product and understand its workings. Do not rely on social media influencers. Many influencers have called covered bonds like fixed deposits with better returns but not spoken about the downside. Read up regularly to keep yourself informed and do not take reactive decisions based on what friends or colleagues are saying. Unless you research, you will not succeed.
Make rules for yourself: For example, have an automated trigger stop loss or profit booking level. This is to avoid getting skewed to one product and to take emotions out of the investment. Try out the product with a small amount before committing more capital. You may not really need to diversify in fun investments. In fact, having too many such products may be more harmful since they are open to vagaries of the system.
I find investors love tools and simulators or gamified content. These can supplement your plan, but it is your emotions which have a bigger impact on returns. Sometimes, to prove that an investment works, investors hesitate from taking action even when there are enough warning signs. Or after early success, one may invest more money. Rebalancing at regular intervals is equally important with fun investing.
Timing the exit: Fun investments need to be monitored regularly and probably more often than regular investments. Exit calls, too, need to be taken swiftly based on market movements. Beware of costs and taxes. Most fun investments have high built-in costs, which investors cannot decipher. In direct investment into international stocks, the costs are between 3% and 5% and the tax compliance increases manifold, and is cumbersome. With stocks/ETFs baskets, there is tax to be paid on each rebalance, thus increasing the costs.
If you find fun investing is stressing you out, you need to exit. If you cannot keep up with the volatility like was seen in the case of bitcoin or you hear some negative news about the platform, exit immediately.
Do you want to allocate precious time for this? Or would you prefer to use your time is a more meaningful way. Thankfully, the Buffett or the Bogle styles are not passé and you can decide to stick to simple investing and high thinking.
Mrin Agarwal is founder director, Finsafe India.