Disclaimer: Points shared in this article are based on my own personal understanding of the Cryptocurrency space. They are not meant to be financial advice nor should it be viewed as concrete evidence to current market circumstances. As always, please do your own research.
BEHAVIORAL PORTFOLIO MANAGEMENT
by C. Thomas Howard
Ever since the 2008 financial crisis, there has been a focus on Behavioural Finance and Economics. In an attempt to keep up with the ever-evolving world of Finance, Thomas Howard developed a transitory approach to the traditional Modern Portfolio Theory in portfolio management.
The book teaches how to develop a portfolio that revolves around behaviour and emotions.
Three Principles discussed in the book:
- Emotional Crowds Dominate Pricing and Volatility
- Behavioural Data Investors Earn Superior Returns
- Investment Risk is the Chance of Underperformance
The book focuses on the entire traditional market and do not mention the Cryptocurrency market however, the principles discussed can be applied when managing your crypto portfolio.
The main topic revolves around emotions in investing. The cryptocurrency market is the epitome of emotional investors which makes the book a perfect guideline to formulate an investing strategy.
Implementing Behavioural Portfolio Management
Three key things:
- Redirecting Your Emotions
- Harnessing Market Emotions
- Mitigating the Damage of YourEmotions on Portfolios
Volatility is the measure of emotions and the book discusses how to tackle the issue with volatility in your portfolios. The contrarian approach is perhaps the best approach when it comes to the Cryptocurrency market — Sell when exuberance is present, buy when there is despair and anger. Going against the masses can be quite a daunting experience but in an emotionally-driven market, it could be your saving grace. Patience is an important trait to counter volatility.
Personal Opinion
The book perfectly describe what goes on in the Cryptocurrency market where just a promise from a whitepaper can determine life-changing amounts to be gained. There are instances where the book goes against the traditional investing philosophies like going 100% in stock markets is a better move than diversifying into other asset classes. The book also goes against the idea of diversification. I believe this can be quite dangerous to the uneducated and irrational investor.
Upon further consideration, his ideas are fully justified. Should an investor wish to maximise his returns, he should go with the most volatile asset class but be educated enough to enter and/or exit the market at the right moment — emotional contrarian. Diversifying is just seen as a buffer to prevent any emotional tendencies. Over-diversification can absolutely hurt performance.
I highly recommend all crypto investor to have a look at this book. It provides a very interesting perspective that has changed the way I manage my own Crypto portfolio.
Let me know your thoughts on the book or in the cryptocurrency market in general!
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Iliya Zaki is the Marketing and Community Manager for Moonwhale Ventures.
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