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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.

But don’t let short-term trends influence your investment approach – they could be counterproductive.

When 'What's hot' becomes 'What's not hot'

Looking back at some investment fads over recent decades, it illustrates 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, 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.

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, even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) 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 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 interesting, 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.

What are you really getting?

It can be tempting to think about adding additional types of assets or strategies to your portfolio, but we will always ask you to consider the following:

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

2. If it is not already in your portfolio, can you reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help you achieve your investment goals?

3. Are you comfortable with the range of potential outcomes?

If you are left with any doubts after answering these questions, you would 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 must clearly 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. Working closely with your Financial Planner can help you create a plan that fits your needs and risk tolerance. 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.

Conclusion

Fashionable investment approaches will come and go, but 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.

 

Past performance is not necessarily a guide to future performance and you may get back less than invested.

This article should be used for information purposes only and is subject to change without notice. None of the information contained in this article constitutes financial or other professional advice in any way. If you require additional information, you should contact Magus directly.

While Magus uses reasonable efforts to ensure that the information contained within articles is current and accurate at the date of publication, no warranties are made, either expressed or implied, as to reliability, accuracy or completeness of the information. Magus accepts no liability for any loss arising directly or indirectly from the use of or action taken in reliance on such information.

No warranty is given as to the freedom of this article from errors, defects, viruses, malicious programs or macros. Links from this article exist for information only and Magus accepts no responsibility or liability for the information contained on any such site. The existence of a link to another website does not imply or express endorsement of its provider, product or services by Magus. Please note that clicking on links to external websites will cause you to leave the Magus website.

Magus Private Wealth Ltd is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3611274. Registered address: Kingfisher House, Northwood Park, Gatwick Road, Crawley RH10 9XN.

Information supplied by Dimensional Fund Advisors Ltd. (DFAL), 20 Triton Street, Regent’s Place, London, NW1 3BF. DFAL is authorised and regulated by the Financial Conduct Authority (FCA).

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