The current investment market atmosphere is truly unsettling, isn’t it? Especially with the escalating tensions in the Middle East, global stock markets seem to be on a rollercoaster ride. Even in such a situation, I heard news that Seohak Gaemi (Korean retail investors who invest in overseas stocks) are flocking to specific products.
Honestly, I was quite surprised. While everyone else is being cautious, there are many who are making aggressive investments. Personally, I was curious about their psychology.
Reasons for Jumping into 3x ETFs, Even Knowing the Risks
In fact, when market volatility is high like it is now, everyone tends to look for safe-haven assets. But our Seohak Gaemi are boldly betting on high-risk products like 3x leveraged ETFs.
I think there might be reasons like these:
- Expectation of short-term high returns: There’s a strong desire to make big profits in a short period when the market fluctuates. Especially with inverse ETFs that bet on a downward trend, even a brief decline can significantly boost returns.
- Information asymmetry: The tendency to be easily swayed by talk that certain stocks or products are good, given the lack of information about overseas markets compared to the domestic market, cannot be ignored.
- ‘One shot’ mentality: Honestly, I believe that many are influenced by a ‘one shot’ mentality, seeing past skyrocketing stocks and wanting to get rich quickly like that.
Of course, the allure of high returns is very strong. But it’s crucial to understand that the risks are just as great.
Does Volatility Increase Losses?
Many people think that if a 3x ETF goes up, you earn 3x, and if it goes down, you lose 3x. But this isn’t a simple arithmetic calculation. Leveraged ETFs can lead to greater losses over the long term due to the effect of compounding.
Especially when the market fluctuates up and down repeatedly, like it does now, the situation gets worse. For example, if a simple stock goes up 10% one day and down 10% the next, it’s back to square one, but a 3x ETF will incur much greater losses.
- The trap of compounding: Because leverage is applied to daily returns, assets can erode when the market is flat or highly volatile.
- Widening tracking error: There’s also a possibility that the tracking error between the underlying asset’s movement and the ETF’s price will widen. Especially in rapidly changing markets, this tracking error can become even larger.
That’s why financial authorities continue to warn that caution is needed when investing in such products.
My Own Investment Principles: 3 Things to Check Right Now
So, how should we invest wisely in this chaotic market? In my experience, setting a few principles is really important.
- First, set goals and a timeframe: You need to clearly define why you are investing and for how long. This will help you not to be swayed by short-term price fluctuations.
- Second, diversify your investments: There’s a saying, ‘Don’t put all your eggs in one basket.’ Investing in various assets can help you prepare for unforeseen risks.
- Third, continuous learning: No matter what product you invest in, it’s essential to thoroughly study and understand that product. Investing based solely on others’ words is truly dangerous.
Personally, I believe that by adhering to these three principles, you can achieve much more stable investments.
Conclusion: Wise Investment Over Reckless Courage!
Honestly, even veteran investors find it difficult to predict a market like the current one. Rather than blindly jumping in with the thought of ‘making 3x,’ I believe it’s important to first understand your investment style and risk tolerance.
I hope you make wise decisions and protect your valuable assets well! May we all have successful investments!