That Old Familiar Feeling

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I recently got into a heated online discussion with a young man that was pitching an investment fund on an internet chat board. It all started with someone asking for thoughts about how to invest the proceeds of a business sale.

“I’ve got an Algorithm with your name on it. It’s up +18% over the last 5 months while market is down around -8% over same period,” replied the would be Wolf of Main Street.

“It's a long/Short algo that auto trades only S&P futures currently, with limited exposure. Somewhat the opposite of HFT. We have small group of investors, very high net worth types. Launched in July and was in development for about a year prior to that. I can email you if you're legitimately interested.”

Sounds legit, right? (HFT is short for High Frequency Trading, I think.)

He became defensive when some others and I asked questions about why he felt comfortable pitching a strategy with dubious short-term performance statistics to someone he had not asked a single qualifying question. He got angry when I inquired if he realized that it is probably a violation of several securities laws to be selling a product like that to an unknown internet audience. He completely melted down when some of us suggested that the role of an advisor is as much about steering our clients away from schemes that can easily lead to an investor losing all of their money as it is about trying to earn decent investment returns.

I get a familiar feeling when I hear about the latest and greatest investment opportunities. Investment fads are nothing new, as I have mentioned previously. You could even say they are like déjà vu, all over again. (Apologies to Yogi Berra.)

Over the years, the common thread of these approaches are that they have sought to capitalize on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short-term trends influence their investment approach may be counterproductive. 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 Becomes Not

Looking back at some investment fads over recent decades can illustrate how often trendy investment themes come and go. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or trends have come into and fallen out of vogue. In the 1950s, the “Nifty Fifty” were all the rage. In the 1960s, “go-go” stocks and funds piqued investor interest. Later in the 20th century, 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. During the 2000s, 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular. In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded. As investors reached for yield in a low interest-rate environment in the following years, other funds sprang up that claimed to offer increased income generation, and new strategies like unconstrained bond funds proliferated. More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” stocks and concentrated exchange-traded funds with catchy ticker symbols have also garnered attention among investors.


The Fund Graveyard

Unsurprisingly, however, numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. 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. Any individual 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.

With the benefit of 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. While these anecdotes can be entertaining, there is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it.

It is important to remember that many investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Of the 1,622 fixed income mutual funds in existence at the beginning of 2004, only 55% still existed at the end of 2018. Similarly, among equity mutual funds, only 51% of the 2,786 funds available to US-based investors at the beginning of 2004 endured.

3 questions to ask when making an investment

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 three questions:

  1. What is this strategy claiming to provide that is not already in my portfolio?

  2. 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?

  3. Am I comfortable with the range of potential outcomes?

If you 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, you should understand the potential benefits and risks of doing so.

In addition, there is no shortage of things you can do to help contribute to a better investment experience. Pursuing a globally diversified approach; managing expenses, turnover, and taxes; and staying disciplined through market volatility can help improve your chances of achieving your long-term financial goals.

Fashionable investment approaches will come and go, but we 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. Remember, also, that following a plan crafted to your needs and risk tolerance never goes out of style. Get in touch if yours need updating.

Adapted from Dimensional Fund Advisors LP February 2017 Issue Brief

Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

Eugene Fama is a member of the Board of Directors of the general partner of, and provides consulting services to, Dimensional Fund Advisors LP.