Investment fads

Sadly, investment fads are nothing new and tragically, when investors select strategies for their portfolios, they are often tempted to seek out the latest and greatest investment opportunities.  However, long-term investors should be aware that letting short-term trends influence their investment approach may be counterproductive.  As Nobel laureate Eugene Fama once said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”

What’s hot becomes what’s not

Looking back at some investment fads over recent decades can illustrate how often trendy investment themes come and go. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets.  In the 1950s, the “Nifty Fifty” were all the rage.  In the 1960s, “go-go” stocks and funds piqued investor interest.  Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of information technology and telecommunication services. In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded.  More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable.

The fund graveyard

Unsurprisingly, numerous funds across the investment landscape have been launched over the years, only to subsequently close and fade from investor memory.  While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of dispersed information and drive it into security prices.  Any individual trying to outguess the market by constantly trading in and out of what’s hot is competing against the extraordinary collective wisdom of millions of buyers and sellers around the world.

It is important to remember that many investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term.  Of the 1,622 fixed income mutual funds available to investors in the world’s biggest market, the US, at the beginning of 2004, only 55% still existed at the end of 2018.  Similarly, among equity funds, only 51% of the 2,786 funds available at the beginning of 2004 endured.

What am I really getting?

When confronted with choices about whether to add additional types of assets or strategies to a portfolio, it may be helpful to ask the following questions:

  1. What is this strategy claiming to provide that is not already in my portfolio?
  2. If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal?
  3. Am I comfortable with the range of potential outcomes?

If investors are left with doubts after asking any of these questions, it may be wise to use caution before proceeding.  Within equities, for example, a market portfolio offers the benefit of exposure to thousands of companies doing business around the world and broad diversification across industries, sectors, and countries.

In addition, there is no shortage of things investors can do to help contribute to a better investment experience. Working closely with a financial planning firm like Wells Gibson can help you create a Wealth Plan that fits your needs and investment risk tolerance.

Furthermore, pursuing a globally diversified approach; managing expenses, turnover, and taxes; and staying disciplined through market volatility can help improve your chances of achieving and/or maintaining your desired lifestyle and achieving your long-term financial goals.

In summary

Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research and implementation may be the most reliable path to success in the global capital markets.