Fashion Fads Are Fun. Investment Fads Can Be Harmful.

Fashion Fads Are Fun. Investment Fads Can Be Harmful.

Fads can be fun. Look at the 1980s: big hair, shoulder pads, acid washed jeans, MC Hammer pants, neon clothes, and the mullet. I personally enjoyed a variation of the mullet – a little Bart Simpson spike coupled with bangs in the front, a rat tail in back, and my football number shaved in above it.

While fads can be fun and later result in embarrassment – especially when your mother posts pictures on Facebook – they shouldn’t be part of your investment portfolio. Heck investing shouldn’t be fun.

Looking back at some investment fads over recent decades can illustrate how trendy investment themes, industries, or trends come and go but may also leave a bit of financial disappointment behind.

1960s: In the 1960s, “go-go” stocks and funds flourished. Mutual funds became prevalent and democratize investing in the stock market. Money piled in and exuberance ensued. In his book The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s, John Brooks argues the collapse was comparable to the Great Depression: As measured by the performance of the stocks in which the novice investor was most likely to make his first plunges, the 1969-1970 crash was fully comparable to that of 1929.”

1970s: The “Nifty Fifty” – popular large U.S. growth stocks – were all the rage. These stocks are credited by historians with propelling the bull market of the early 1970s. As the fad flourished and investors piled in, the Nifty Fifty’s subsequent crash and underperformance through the early 1980s are another example of what may occur following a period of euphoria and ignorance of fundamental valuation.

1990s: Technology stocks soared into the dot-com bubble while pundits claimed Warren Buffett lost his mojo. The term “irrational exuberance” was coined by Yale Professor Robert Shiller in 1996, describing the irrationality of high stock prices and the emotion driving them, and later made popular by Alan Greenspan. It took a few more years but the bubble did indeed burst or perhaps explode.

2000s: Real estate can only go up. While we (should) know that not to be true today that was the belief then. Declining interest rates, favorable government policies, and subprime mortgages fueled the emotional bubble. But this time Wall Streeters generously exported the risk and ensuing Global Financial Crisis worldwide. The 2000s had several other fads as well. The emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular. After the financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded and have generally disappointed investors in the years since.

Today: FAANG stocks – Facebook, Apple, Amazon, Netflix, and Google – are all the rage. Bitcoin was too – until it lost more than 75% of its value in 2018. Time will tell how the FAANG craze plays out, but if history is a guide, some of these are unlikely to live up to exuberant expectations investors have for these stocks today.

The Mutual Fund Graveyard

Numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. Some were based on fads. While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of information and drive it into prices. Anyone trying to outguess the market is competing against the extraordinary collective wisdom of billions of buyers and sellers around the world.

With 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. Said another way, slightly more than half persist – quite a high failure rate indeed.

What Am I Really Getting?

When confronted with choices about whether to add additional types of assets or strategies to a portfolio, start by asking two question. First, what is this supposed to provide that is not already in my portfolio? Second, can I reasonably expect that including it or focusing more on it will increase expected returns, reduce risk, or otherwise better help me achieve my investment goal? If you are left with doubts after asking these, it may be wise to use caution before proceeding.

Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research and consistent implementation will be the most reliable path to success in the investment markets. 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.”

Working closely with an experienced Certified Financial PlannerTM can help you create a plan that fits your life and what you want from it. After the plan is crafted, your investment portfolio should be constructed from science-based evidence and carefully be matched to meet your life goals. Then do planning to avoid unnecessary taxes. Lather, rinse, repeat (but leave the mullet or derivations of it behind).

Embarrassingly Yours,

Kevin Kroskey, CFP®, MBA
Football #21