Investors: Chasing What’s Hot Could Leave You Naked On The Beach
The naked man’s butt jiggled as he strolled by sunbathers on the Mediterranean beach. His backside soon disappeared beneath the waves as he frolicked in the lovely blue water. Others swam nearby, wearing bathing suits.
As the tide continued to rise, one or two other brave souls joined the man in his birthday suit. “That looks like so much fun,” a young boy said to his mother. “Can we join in?” “No,” she said.
The tide kept rising and a few others ditched their swimwear. Then, with the tide near its highest point, hundreds of previously clothed bathers splashed naked into the sea. They giggled together while the sun beat down.
The woman with the young son moved their towels, chairs and clothing back as the waters inched up. The rising tide began to snatch some of the swimmers’ clothes. The giggling that came from the naked swimmers’ grabbed more and more attention. They were having so much fun; streams of others joined in. Few people, it seemed, were prepared to miss out.
This describes investing. Most people that abandon time-tested strategies do so when others appear to be making so much easy money. But people, unfortunately, are a lot like sheep.
The highest performing ETFs in 2020 were a strong case in point. People weren’t falling over themselves to buy Cathie Wood’s ARK ETFs back in 2017, 2018, or 2019. No, they bought them AFTER they had risen a lot. They bought them after they had gained about 170 percent in 2020. They bought them early in 2021, while those funds appeared to pack profits onto profits. Buyers made up stories to say, “We don’t need to diversify. Look how much money these ETFs have made!”
Canada’s national newspaper, The Globe and Mail, asked me to write about them in early 2021. I interviewed a man who bought them six months before. He said, “I expect to earn at least 20 per cent a year [with Ark funds] over the next 20 years.” He swam naked. His clothes were nowhere near the beach.
Then the tide went out. In this December 2021 Swissquote column, I stated two things: Cathie Wood’s ARK funds had earned spectacular returns, but most of the people in those funds earned poor returns.
Let’s start with the first statement. Cathie Wood’s ARK funds averaged the following annual returns from their September 30th 2014 inception date to May 14, 2021: 39.77 percent (ARKW); 25.87 percent (ARKG); 33.97 percent (ARKK) and 25.87 percent (ARKQ). Her fifth fund (ARKF) averaged a compound annual return of 55.28 percent since its inception on February 4, 2019.
But most of the people who invested in those funds didn’t do well.
According to research from the Bespoke Investment Group, the average investor in these funds averaged just over 5 percent per year.
That’s because they bought them when they appeared to be easy, can’t miss investments. They bought them after the funds had already recorded spectacular gains in 2020 and duing the first part of 2021. They bought them during a moment of euphoria, when so many people had ditched bathings suits.
Then the tide went out.
From early 2021 to May 23, 2022, those once-popular ARK funds are down an average of about 72 percent. For investors who bought them at the height of their popularity, you might wonder how much they’ll need to make to break even. The answer is 334 percent.
That math might sound strange. But if we lose 50 percent, we have to gain 100 percent to get back to even. If we lose 90 percent (dropping a $10,000 investment to $1000) we have to gain 900 percent to get back to where we were.
Today, the global stock market index is down about 15 percent (January 2022 to May 23, 2022). A diversified portfolio comprising 60 percent global stocks and 40 percent global bonds is down about 12.6 percent. That’s a lot better than Cathie Wood’s ARK funds. It’s also much better than last year’s most popular technology stocks. Over the same time period, Tesla was down 36.14 percent, Facebook dropped 42 percent and Netflix plunged 70 percent. And when were those stocks at the peak of their popularity? You guessed it: not long before the plunge.
So what are investors chasing now? They’re clamoring for oil and gas stocks and oil and gas ETFs.
That’s what we do.
We chase what’s hot (typically after it has risen) like dogs chasing tails.
The iShares US Oil and Gas EF (IEO) has gained a whopping 52 percent from January to May 23, 2022, measured in USD. Naked investors are now really piling in.
Instead, build a balanced, diversified portfolio of ETFs. Over your lifetime, you’ll thump the returns of almost everyone seeking quick, easy gains. And you won’t face a long naked walk looking for your clothes.
Andrew Hallam is a Digital Nomad. He’s the bestselling author Balance: How to Invest and Spend for Happiness, Health and Wealth. He also wrote Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.