Taking the Path Less Traveled
Investment fads are nothing new. When we are selecting an investment strategy, we are often tempted to seek out the latest and greatest investment opportunities; in fact, to do anything else would be counter intuitive.
Over the years, these approaches have sought to capitalize on developments such as technological advancements in the economy, popularity of different natural resources, and political agendas from policymakers. However, investors should be aware that letting short-term trends dictate their long-term investment approach is a strategy that is not without its flaws. As Nobel Laureate, Eugene Fama, 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 CAN QUICKLY BECOME WHAT’S NOT
Let us examine historical events for some context and to see just how many investment fads have come and gone. In the late 1980s and early 1990s, investors jumped on the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan due to a perceived rapid industrialization of the manufacturing sector. Less than a decade later, that infatuation was redirected to the emergence of the “BRIC” countries of Brazil, Russia, India, China, and their new place in global markets.
In the 1950s, the “Nifty Fifty” (companies you could buy and hold forever) were all the rage, up until the 1960s, when “go-go” stocks and funds began to pique investor interest. Later in the 20th century, a growing belief in the emergence of a “new economy” led to the creation of mutual and hedge funds willing to bet on the rise of technology and telecommunication services. In the wake of the 2008 financial crisis, “Black Swan” funds, tail-risk hedging strategies, and liquid alternatives abounded. Then, as interest rates hit rock bottom, investors looking for yield created yet another demand that mutual fund companies were happy to serve, leading to the creation of funds that held questionable credit quality issues. More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation have become fashionable. Are you noticing a pattern?
While economic, demographic, technological, and environmental trends shape the world we live in, it is important to note that they have not proven to be a reliable source for creating a sustainable investment strategy – “sustainable” being the key word. Occasionally, and often by coincidence, a combination of good timing and luck will result in a manager’s ability to seemingly predict the next Google or Amazon. However, more often than not, short-term momentum is quickly followed by a major pullback by the time the next trend emerges.
Historical evidence has shown that public markets have the ability to aggregate information into security prices. An individual investor who constantly trades in and out of what is hot is, in reality, competing against the collective wisdom of millions of buyers and sellers around the world. In hindsight, it is easy to point out the fortune one could have amassed by making the right call on a specific industry, region, or individual security over a specific period; but, while these anecdotes can be both entertaining and captivating to an audience, there is compelling evidence illustrating just how futile the attempt to outsmart the market can be.
What history has shown us, time and again, is that investment trends do not withstand the test of time. In fact, of the 2,414 Equity mutual funds in existence at the beginning of 1999, only 42% exist today. Surprisingly, during this time frame, Fixed Income mutual funds experienced an even less favorable survival rate of 41%.
WHAT SHOULD I DO?
When confronted with choices about whether to add additional types of assets or strategies to your portfolio, ask yourself the following questions:
- What value does this strategy add that my existing portfolio doesn’t have?
- Will this strategy increase my portfolio’s expected return over the long-run or reduce expected volatility?
- Does this strategy increase my odds of achieving my investment goals?
- Am I comfortable with the range of potential outcomes?
If investors have any doubts after asking any of these questions, it may be wise to use caution before proceeding. History has shown that fashionable investment approaches will come and go, but working closely with a qualified advisor to prioritize both needs and risk tolerance should be the foundation of your plan. Pursuing a globally diversified approach, managing expenses, turnover, and taxes, and staying disciplined through market volatility has proven to be the most reliable path to success when investing in capital markets.
William Wang, CFP®