What’s Hot, What’s Not?
Key Takeaways
Investment fads are akin to those in fashion in that there’s something new every other month. Nifty Fifty, Asian Tigers, Dot Com, and BRIC are some notable fads over the past few decades. The current latest trend is artificial intelligence.
Many funds which pander to trends are typically launched due to investor demand, only to subsequently close and fade from investor memory.
Many fads, and indeed, most mutual funds, do not stand the test of time. Investing in a concentrated manner will expose your money to risks that you probably don’t want to take.
There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a new marketing idea every week.
— Eugene Fama
If you follow fashion trends, you would realise how fickle and ever-changing the industry can be. New styles come out every season, rendering the previously hottest trends suddenly passé. Those who wish to remain sartorially relevant can end up being caught in a frenzied cycle of paying hefty prices to ensure that they keep up with latest changes.
For instance, the news recently reported that British-Italian menswear brand Jordanluca’s S$900 jeans sold out; the jeans in question featured a peculiar colouring at the crotch area which resembled a pee-stain. The people who bought the jeans definitely thought it was worth the price. If you think that this is outrageous, don’t forget that Balenciaga was ahead of the pack, selling what looked like ordinary household items for thousands of dollars.
Now we don’t know if and when these items will go out of style, or whether they will stick around for a while. But knowing fashion trends, it is likely that something new will pop up every couple of months.
Investment fads work in a similar way. When selecting strategies for their portfolios, we are often tempted to seek out the latest and greatest investment opportunities. Over the years, these approaches have sought to capitalise on developments such as the up and coming growth of particular countries, technological changes in the economy, or the popularity of different natural resources.
But while the undiscerning fashion aficionado may just end up with a closet of pricey peculiar products, investors may end up with the more severe consequence of holding a portfolio that is overly-concentrated on risky products which sounded exciting on paper but are now floundering in defaults or capital losses. This is a bigger concern as it impacts your hard-earned money and there is no way to turn back the clock to correct your mistake.
Nifty Fifty
Looking back at some investment fads over recent decades can illustrate how often these trendy investment themes come and go. In the 1950s to 70s, the “Nifty Fifty” were all the rage. These 50 large-cap stocks were the most popular and high-growth stocks of the US market with double digit annualised returns for many years. However, when growth slowed, the 70’s oil crisis hit, these growth companies hit a wall, and investors who bought near the peaks had to wait for decades before recovering.
Asian Tigers
In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. Inevitably many Asian countries were caught up in the growth wave and overspent, creating unsustainable debt levels which eventually led to a market collapse during the Asian financial crisis in the late 90s.
Dot Com
This was then followed by 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. This came to a head during the dot-com bubble where highly overpriced technology firms came crashing down when investors eventually realised (many were too late) that these firms did not have any revenue.
BRIC
Shortly following the dot com bubble was the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Many investors piled into this attractive sounding acronym only to receive very much less returns than expected.
The List Goes On
We had a biotech bubble from 2013 to 2016, the rise (and current fall) of a new “next gen” investing pioneered by Cathie Wood and her ARK funds, cryptocurrencies, NFTs and even marijuana cultivation. At the moment, there is a lot of buzz around Artificial Intelligence and the way it can potentially revolutionise many of our existing processes. There is no shortage of new and exciting developments and investments to look at every moment in time.
The issue here is determining which of these developments is likely to persist and not fall by the wayside. For instance, whilst the dot-com bubble wiped out many companies, those that survived are very much stronger today and play a large role in the economy. However, this is with 20/20 hindsight. When you are living in the moment, would you have any idea which one would rise to prominence?
Unsurprisingly, numerous funds which pander to trends are typically launched due to their overwhelming demand, only to subsequently close and fade from investor memory. A large proportion of funds fail to survive over the longer term.
A latest study on fund survivorship by Dimensional Fund Advisors showed that roughly 2/3 of the equity funds were still around after 10 years, with less than half still around after a longer period of 20 years. It is similar with fixed income funds. So whilst you may subscribe to the tenet of long term investing, your investment vehicle may not be available for you to do so!
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. In essence, markets reward companies which innovate, make a profit and rise to the top and punish those that don’t.
How do you ensure that you are not holding onto those losers?
It is important to remember that many investing fads, and indeed, most mutual funds, do not stand the test of time. Investing in a concentrated manner will expose your money to risks that you probably don’t want to take.
When faced with choices about whether to invest in additional types of assets or strategies for your portfolio, it may be helpful to consider;
Am I already holding some form of this strategy in my existing portfolio?
If it is not inside, what 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?
What are the possible downsides or maximum losses I could face from this?
If you are left with doubts after asking any of these questions, it may be wise to use caution before proceeding. If you want a better investment experience, there is no shortage of things you can do to ensure that you are on the right track. Working closely with a fiduciary advisor can help you create a plan that fits their needs and risk tolerance.
This is in addition to tried and tested tenets such as pursuing a globally diversified approach, managing expenses, turnover, and your behaviour during stressful market situations.
So remember like fashion, in vogue investment approaches will come and go. But a long-term, disciplined investment approach based on robust research and implementation will be the most reliable path to success.
If you need a second opinion on your investment portfolio, come and chat with us.
