by Andrew Dines
Director & Chartered Financial Planner
It has been 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.”
Investment fads are nothing new. When selecting strategies for their portfolios, investors 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 perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources.
Looking back at some investment fads over recent times can illustrate how often trendy investment themes come and go. Most recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable.
Unsurprisingly, numerous funds across the investment landscape were launched over the years targeting these fads only to subsequently close and fade from investor memory. 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 isn’t a tactic that individuals need to employ. There is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it.
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:
- 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?
- 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. While there can be good reasons to deviate from a market portfolio, investors should understand the potential benefits and risks of doing so.
There is no shortage of things investors can do to help contribute to a better investment experience. Working with a Financial Planner can help individuals create a personal plan that fits their needs and risk tolerance. Adopting a globally diversified approach; managing expenses, turnover, and taxes; and staying disciplined through market volatility can help improve investors’ chances of achieving their long-term financial goals.
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.