I have been receiving numerous calls and emails, asking me what I think about buying gold coins, silver coins, bitcoins, foreign currency and flipping rental property.
In almost every case, the person contacting me is retired, and they cannot afford to lose money. However, the prospect of making money quickly is so attractive, they are considering a spin on the roulette wheel.
According to an article about behavioral finance on Investopedia.com, a number of behavioral biases cause investors to make decisions that are less than optimal. Here are a few of these biases:
1. You are attracted to the next big thing. Bitcoin definitely is new, but whether its the next big thing remains to be seen. The interest in Bitcoin comes from the fact that the price of this digital currency has quickly grown from $200 to $1,200, so the sense is that now is the time to jump in.
Just because people are talking about something, and its new and the value has increased, does not mean this is a good investment. There are already other, newer digital currencies being developed. According to Investopedia, we are hard-wired to find novelty appealing, and combining novelty with a get-rich-quick scenario can be dangerous.
2. You want to do something because everyone else is doing it. Lets talk about gold and silver coins. According to the advertisements, everyone is buying them because its believed that the U.S. dollar is about to crash.
There are even celebrities endorsing this idea, stating, Thats why I own physical gold. There are also newsletters, written by people who sell these coins, making the case for why you should buy them.
Anyone can take any investment, and show how that investment performed over a specified period of time, and make it sound attractive. And, no one investment is right for everyone. So when I hear ads that make it sound like everyone should be doing the same thing, a big, red flag goes up in the back of my head.
3. You enjoy listening to TV analyst recommendations. There was a case last year where a well-known TV investment analyst had to pay a huge fine because he was paid to publicly endorse a stock.
When you are listening to someone, are you listening to pure, independent analysis, or are you listening to an advertisement? Think carefully about who is paying the analysts salary before you make significant decisions on his or her advice.
4. You believe you can beat the system. People have a natural tendency to believe that they can do this. Why else would Las Vegas or lottery tickets exist?
As you consider a new investment, ask yourself honestly whether you have the expertise to select investments. If you do, great. If you dont, get reputable advice and stick to the get rich slow plan.
Sherri Goss is vice president of Rosenberg Financial Group Inc., with offices in Macon and Warner Robins. Contact her at 478-922-8100 or firstname.lastname@example.org.