“I’m a physician and all the doctors in my practice are talking about Nvidia stock. It has skyrocketed in value. Many docs recently purchased it, and they discuss the price increase every day. Should I be buying Nvidia for my portfolio?” – Anonymous, West Hempstead, NY
This question is particularly relevant now given the meteoric rise of several popular technology companies. Though the conundrum isn’t really novel. I receive a version of this question regularly from clients, friends, and acquaintances. Just replace “Nvidia” with any trendy investment. In the recent past, this has included Tesla, cryptocurrency, SPACs, NFTs, private credit, real estate deals, and access to various alternative “opportunities.” While the investment has a different name, the fact pattern is always the same:
- Friends are all chatting about an exciting investment.
- Person wants to partake.
- Person does little to no due diligence.
- Person invests at the height of the frenzy.
- Person inevitably loses money.
It’s possible Nvidia may continue to rise. It also may plummet like many of the aforementioned investments. The main point, and a good reminder for all investors, is: You will NOT win the investing lottery! You will not find the next Nvidia at the IPO price or participate in the next real estate/SPAC/private credit “opportunity” that will achieve returns that outpace the overall market. If you invest like a gambler, you should be prepared to lose money.
The lucky people who will stumble upon the next Monster Beverage (which has far superior returns to even Amazon!) are few and far between. Attempting to replicate a strategy that relies primarily on hope and luck is a fool’s errand. Hope and luck are both good things, but neither one of them is a prudent investment strategy.
The good news is that you do not need to win the investment lottery to be successful!
The key to riches is having a process to build wealth over time. This includes:
- Spend less than you make. In retirement, this translates to having a “safe withdrawal rate”. Deciding on a high savings rate gives investors control over their financial lives. After receiving a paycheck, it is typically helpful to automatically save funds before spending any money. This concept is referred to as “pay yourself first” and it allows you to ensure that you are preparing for your financial future before anything else. I often recommend that my clients sign up for their company retirement plan, which allows them to seamlessly save and invest money every paycheck. Furthermore, I always recommend that my clients have a minimum of 3 to 6 months’ worth of expense money on hand as a cushion for an unforeseen expense. This simple concept is the cornerstone of financial planning.
- Invest the difference prudently in a diversified portfolio. A diversified portfolio, like all my clients have, would already have exposure to Nvidia without taking individual company risk. I have many friends who have large, concentrated positions in stocks that they never believed would go down. This includes well established companies like Boeing, General Electric, or Lehman Brothers. Each one of these companies has a unique story, but they all share the same lesson on the importance of staying diversified.
The problem with diversification, or having exposure to a variety of areas of the market, is that it’s boring! You will never be able to discuss an exciting stock that you purchased, or a strategy that is in vogue. It’s fun to schmooze about these things with friends, but it is not the path to accumulating wealth. The ability to gain exposure to various areas of the market through diversification will allow you to achieve more predictable return patterns with less risk.
- Ignore the noise. I discuss this topic often, but it’s always worth repeating. “Noise” includes your friends who are making a “killing” on the hot investment du jour, your broke brother-in-law who is telling you to day trade cryptocurrency, or your college roommate who is raising money to buy land in Texas. It may also be the financial media who are obsessing over the latest geopolitical risks or how the recent economic numbers should impact your portfolio. None of these things should impact your investment strategy. Stay focused on yourself and your goals and tune out the various distractions.
- Stick with the strategy over the long-term. This is much easier said than done, and by far the biggest challenge for most investors. The noise gets to all of us. We have self-doubts about our strategy because it always appears that someone else is doing better. Remember, the real money is made in the long game through compound interest. Pick a strategy and stay invested through good and bad times. You will be amazed at what you have accumulated over the decades of staying the course.
The ability to “stick with it” is particularly challenging for the wealthiest and smartest among us. They often believe they can find a quicker or better way to financial success. Spoiler alert: There isn’t one! The biggest obstacle to growing your wealth is staring at you in the mirror every day.
- Make modifications when necessary. There will be situations that arise in your own life that warrant adjustments. This includes death, divorce, a big bonus, being laid off, a career change, and many more. Additionally, if your portfolio is out of sorts due to market dynamics it may require modifications. While overhauling your portfolio on a whim is imprudent, making necessary adjustments when life or market events occur is sensible. It’s worth discussing various updates in your life with your financial advisor to ensure you are making sensible decisions to achieve your goals.
The pathway to wealth is slow and boring. It requires small wins overtime, minimizing your mistakes, and the ability to stick with your strategy. Unfortunately, human nature pushes us every day to take a different and more speculative path.
This is all a long-winded way of answering the above question. The short answer is “No, you should not feel motivated to buy Nvidia just because all your colleagues are buying and talking about it.” While it’s possible to win the investment lottery, it is not probable. Most early buyers of Nvidia (or other stocks that skyrocketed in price) got lucky. They shouldn’t bank on that luck continuing. Rather, they should focus on implementing a process that includes the above five steps, which increases an investor’s probability of building a substantial nest egg over time.
