You probably don’t want to talk about this right now after having seen your investments squiggle up and down 10% every week, but today I do want to share some thoughts on investing that could help you make the right decisions going forward.
In times like these, when there are big market drops and increased volatility, you may think you need to suddenly change your investment strategy. This started me thinking about the many investment fads that come and go over an investor’s lifetime. And I have seen many of them.
To paraphrase the famous Nobel Laureate, Eugene Fama, who once said something to the effect that, “There’s one significant new idea in finance maybe every 10 or 15 years, but there’s a new marketing idea every week.”
So, a marketing idea as opposed to an investment idea? What do you think he’s saying? I think he’s saying that great investment ideas are normally evolutionary, taking years to perfect and bubble up through the noise. Ideas like value investing, the idea of mutual funds so many years ago, ETFs, quantitative investing, and modern portfolio theory took decades to develop and become part of the mainstream. And even with all those years, professionals still argue about their merits all the time.
Marketing ideas, however, are borne out of the commercial need to drum up new business, and some American companies and many so-called investment advisors slickly specialize in this area.
Is It Time To Change Your Investment Strategy?
Should you be looking to make major changes to your portfolio, make sure you’re sticking to the tried and true and don’t jump into the latest investment fad of the day.
And maybe don’t do anything at all, but if you must, realize that it’s a bit like locking the barn door after the horse is already gone. It would probably have served you better had you done that before the market dropped more than 10% in just a few days. Changing your investment strategy to try to fit an event that’s already occurred doesn’t usually work out well.
The History Of Investment Fads
Let me tell you about the history of various investment fads, so you can easily see how many of them have come and gone. In the 1960s and ‘70s, the great rage of the time was an investment in the “nifty fifty” stocks, a group of large-cap, blue chips, which were often described as “one-decision” stocks because they were viewed as extremely stable, even over long periods of time.
Of course, that stability came at a high cost as most of them sold at sky-high PE ratios resulting in valuations that were far in excess of the true value of the businesses.
Many survive to this day and many do not, but all in all, the returns were less than stellar. And if you missed just a few of the good ones, the returns were a complete disaster.
The late 1990s and early 2000s saw a lot of focus on the “BRIC” markets (Brazil, Russia, India, and China), which did well for a while then lost a good deal of money. There was also the dot-com bubble fad, followed by the bubble burst when many investors threw money at any stock that was even remotely connected to the internet. The idea was kind of right, but the investments were awful. I remember the Biotechnology fad in the ‘80s when the potential of a new world of eradicating disease was the marketing promise of the day. As with all of these, the ideas have merit, but which companies succeed and when is always the great unknown. The 2008 financial crisis spawned plenty of new strategies, such as “Black Swan” strategies. (For those of you who may not know, the coronavirus is not, according to Nassim Taleb, the creator of the term, an example of a Black Swan event, meaning that it was an event that was predicted but could not be timed. A typical Black Swan episode is a totally unforeseen event.
Now today, the current popular investing trends continue to be strategies that aim to profit by identifying (or guessing, if you will) who the ultimate winners will be among cryptocurrencies or the cannabis companies.
Often an investment fad explodes onto the scene and glows like a Super Nova, flaring-out once reality sets in. We saw a great example of this with the Cannabis company Tilray which IPO-ed at 17, soared to $300 and now currently sits at $6.50
Why don’t trendy investment strategies usually work? In large part because most of them are aiming to do something that’s simply nearly impossible to do—outguess the collective wisdom of tens of millions of investors whose actions ultimately determine the prices of stocks. Also, investors are operating under the “greater fool” theory in which investors have the hope they will sell their stock to a greater fool than they are.
Yes, there are stories of someone occasionally “outsmarting” the overall market for a period of time, but such stories—the true ones anyway—are few and far between, and they don’t tend to remain true over the long haul. For example, I know of one seasoned investor, whose advertisements today tout that he bought Microsoft at 3 and Amazon at 10 and so on. What he doesn’t advertise is that he ran a hedge fund that blew up because his overall investment performance was so miserable.
Smart Moves To Make Now
So, what are some smart moves you should consider making right now in regard to your investment portfolio? It’s certainly a good time to sit down with your financial advisor and do a normal review of your portfolio. If you’ve been hiding your head in the sand, it’s safe to come out now.
If you are considering adding some new assets or strategies to your investments, the first thing to check is whether they will actually add something to your portfolio that’s not already in there. Then you can discuss with your advisor or your dad or mom, whoever knows more than you, whether making some changes is likely to help you better achieve your goals and be in line with your risk tolerance. It’s also a good time to consider offsetting any gains you may have by selling some losing stocks and taking your losses. Also, consider the relative tax advantages of one investment over another and review your fees and transaction costs to make sure those are as fair as possible.
In the end, most investors do better simply by staying disciplined during times of increased volatility and market uncertainty, rather than by making rash, impulsive changes to their overall strategy. What I like to say is that both you AND your portfolio should be quarantined right now.
Just as in the world of fashion, investing fads come and go, but if you’re going to invest in individual companies, please make sure you understand the business, the balance sheet, their competition and the possible future rate of return based on the current stock price and a reasonable forecast of future earnings. If you can’t or don’t want to do that, stick with getting just the right funds to satisfy your long-term goals.
Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. There are no investment strategies that guarantee a profit or protect against loss. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however, their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.