Investments Too Good to Be True
November 30, 2022
Another large speculative company fails, and investors lose billions, writes Peter Watson.
In life, people like to pick a winner, and this is certainly true in the world of investing. But this can sometimes backfire.
Until recently, FTX was a global giant as a cryptocurrency exchange platform. According to CNBC its value was $32 billion.
That was before it suddenly declared bankruptcy. Instantly investors lost billions, including its Chief Executive Officer, who has now resigned.
The bitcoin market reminds me a little of the hype on marijuana stocks a few years ago. There is a derogatory expression that describes some new investment opportunities as “the new shinny object.”
The best advice we can offer with these types of investments is buyer beware.
There are literally thousands of different investments that can be made, so venturing into risky opportunities is not necessary.
A second observation is when investors are lured into speculative types of investments, it is critical to remember a basic foundation of investing and that is to have strong diversification.
For example, an investor that had five per cent of their portfolio invested in FTX could lose just five per cent. That would be a disappointment and would not likely be an unmanageable loss.
At the other extreme if someone had invested all their money, and perhaps even borrowed to make the investment, this sudden bankruptcy and loss of value could be devastating.
The FTX example of a very large company suddenly declaring bankruptcy is just what is in the news today.
There will be others.
Always remember the importance of strong diversification.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Only investment-related products and services are offered through Watson Securities of ACPI. Peter Watson provides wealth management services through Watson Investments. He can be reached at www.watsoninvestments.com