Ready to invest in the next “sure thing”?

Jeff Bernier |

By Jeff Bernier, CFP®

Investment fads are nothing new.

Back in the mid-80s (when I was a fledging advisor!), everyone seemed to be investing in Government Securities Plus mutual funds, which were marketed as high quality government bonds. Investors were reaching for yield, but because the funds used options strategies to boost yields, when rates went up, investors lost big.

Fast forward to the early 2000s, and the new feeding frenzy was over tech stocks. I still remember sitting at child’s birthday party listening to two friends bragging about how much money they had made in a concentrated tech fund. They were silent when I saw them after the bubble popped.

In the mid 2000s, the new “sure thing” was buying property in the Florida Panhandle. Seeking a “guaranteed profit,” I watched scores of people take out interest-only loans with plans to flip the property and get rich quick. We all know (some all too well) what happened next: foreclosures and short sales.

Today, lots of investors seem to be heading down a similar rabbit hole—this time chasing the “innovative” investments within their portfolios. Bitcoin was hot—until it was not. “FAANG” stocks were raking in returns—until they fueled the 2018 market decline. Lately, I’ve been hearing rumblings about peer-to-peer lending, specialty ETFs, and “green” funds.

If you’re tempted to shift your strategy to chase yield via the newest fad du jour, maybe these words from Eugene Fama, the father of the efficient-market hypothesis, can help: “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.” Or this: “I’d compare stock pickers to astrologers but I don’t want to bad mouth astrologers.”

Still think you’ve found a new path to get rich quick? Here are the facts to consider:

  • Many funds across the investment landscape have been launched over the years, only to later close and fade from investor memory. As Phil Bak called out in his fantastic article, “i” is for Imitation, one of the largest fund managers has closed no less than 88 ETFs over the years as they moved on to the “next best thing.” And of the 1,622 fixed income mutual funds in existence at the beginning of 2004, only 55% still existed at the end of 2018.
  • Historically, the markets are truly efficient, aggregating a vast amount of dispersed information and driving it into security prices. Investors who try to outguess the market by constantly trading in and out of what’s hot are pitting themselves against the extraordinary collective wisdom of millions of buyers and sellers around the world.

It’s easy to look backwards and find the industry, region, or individual stock that would have delivered a fortune “if I’d only known.” But identifying those opportunities before they happen and profiting from them is more luck than skill.

So what’s an investor to do? When confronted with choices about whether to add additional types of assets or strategies to a portfolio, consider asking yourself these two key questions:

  1. What is this strategy claiming to provide that is not already in my portfolio?
    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?
  2. Am I comfortable with the range of potential outcomes?
    There’s no doubt about it: some outcomes are great. I know people who invested in Apple decades ago and are still reaping the benefits today (even despite the big drop in January). I also know people who invested in Best Buy and Borders. Enough said.

If you want to gamble, Las Vegas is a great place to spend your vacation money. If you want to protect your wealth, the best “sure thing” I know of is investing in a diversified, balanced portfolio that relies on the efficiency of the capital markets by including exposure to thousands of companies doing business around the world and broad diversification across industries, sectors, and countries. (Watch our video on the importance of diversification here.)

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