By Michael O’Connor

The S&P 500 ended last week down 14%, a bitter pill to swallow for many investors. Still, these losses pale in comparison to the earth-shattering declines that some of the more speculative sides of the market are currently experiencing.

Today's article – A lesson in what not to do.

The tech-led NASDAQ index is down 22% in 2022. ARKK, once the highest-flying tech fund on Wall Street, has come crashing down to earth, down over 70% from its highs and lastly, spare a thought for those taking maximum risk; NFT and Altcoin traders are getting their faces ripped off as we speak.

But didn't we all know this was going to happen?

Didn't the incessant and illogical rise of these speculative Crypto and Tech positions have to end in tears eventually?

The simple answer is yes.

But the 'when' and 'how' were always unknown.

When everyone is playing and winning, it's easy to convince yourself that you can play and win as well. It's hard to imagine the music stopping when it has been playing for so long.

People do crazy, illogical things all the time, even when they know better. This isn't the first time that greed pushed investors towards self-destruction, and it certainly won't be the last.

This article isn't intended as a snide rebuke of the investors who hold these positions. Many of those currently watching their trading accounts crater also made phenomenal gains in 2020 and 2021.

This is merely a cautionary tale highlighting that markets are cyclical, investment strategies come in and out of favour, and nothing lasts forever.

Most importantly, always know the difference between speculating and investing.

As humans, we are drawn to speculation. We buy lotto tickets not based on probability but on hope. You can ignore the statistical improbability of winning by uttering four naïve but equally alluring words: "ya, but what if".

After all, technically speaking, 'it could be you'.

In recent years, many people 'invested' in their stock position based on the same rationale. It wasn't based on the company's solid fundamentals or attractive free cash flows; it was determined purely on the basis of 'what if?'. What if it continues going up? What if it doubles again? Let's face it, for many; this argument can be far more enticing than any precise financial projections.

There is nothing technically wrong with this speculative approach, provided you realise you're doing it, and it is done in small doses. Still, you need to separate this from your investing portfolio. They're not the same thing.

90% of your assets should be positioned to generate returns over the long term. Your focus should not be on betting it all on a low probability outcome with the outside promise of winning it big.

This seems obvious, but many convince themselves they are investing based on probability and risk-adjusted returns when they are actually just closing their eyes, crossing their fingers and spinning the wheel.

Make sure you know the difference.

Investing 101

Create a balanced and diversified portfolio of equities, real estate, commodities and alternatives based on your view of the world in the future, your time horizon and your risk tolerance.

Invest in indexes you believe will be successful over the long run and then allow enough margin for error through diversification to protect when you are wrong.

And you will be wrong, but that's ok. You just need to be right more often than you are wrong.

If you would like to learn more about how to start investing, go to theislandinvestor.com.