Illusions of Safety

By Jonathan Clements of HumbleDollar

IF WE WANTED to design a portfolio that appeals to our worst investment instincts, we might couple a savings account with lottery tickets. Some governments have even issued bonds with just these characteristics.

What’s the attraction? The savings account ensures that part of our portfolio never loses value, while the lottery tickets let us dream of riches in return for a relatively small investment.

This year, we’ve seen the lottery-ticket mentality writ large, as investors take fliers on meme stocks, nonfungible tokens and cryptocurrencies in hopes of hitting the jackpot. For instance, earlier this year, dogecoin could be bought for under a penny—less than the price of a lottery ticket. With a little daydreaming available for so little money, maybe it’s no surprise that dogecoin is up more than 6,000% in 2021, even after this month’s shellacking.

But while this year’s frenzy over fringe investments has hogged the headlines, let’s not forget our other behavioral impulse: our strong aversion to losses. This instinct may not lead to short-term financial disaster. But it can wreak havoc over the long haul. What’s so wrong with trying to avoid losses? It can result in three crucial mistakes… read more