There’s usually a distinction between fashionable investments and those centered around financial science. Because investors are attracted to narratives and stories, fashionable investments sometimes appear more attractive than they are in reality.
We worked with a client a few years ago who only wanted to invest in the newest, shiniest investments thinking that might give him higher returns. He thought of mundane investments like mutual funds as totally “old school.” For the most part, however, when you look at many new and fashionable investments, they are just old strategies re-packaged in a way that appeals to investors today. There’s scant evidence to suggest that higher investment returns follow these fashionable innovations.
Why Fashionable Investments Falter
By analogy, think about investment attributes like an eight-ounce glass of orange juice. Specific positive investment benefits such as personalization, diversification, liquidity, low cost, tax efficiency, long-term growth, price stability, and transparency all represent ounces of juice. If you want four ounces of liquidity and three ounces of growth, that leaves just one ounce for everything else.
For investment purposes, there are only eight ounces of juice in an orange.
Many fashionable investments claim to offer a few ounces of everything. I call these “unicorn investments” because they are derived from mythology and don’t actually exist in the real world.
It’s good to remember you have an eight-ounce limit. Regardless of how much innovation is portrayed, you can’t realistically have an investment with an equal distribution of all the positive attributes.
You should pay attention to what fashionable investments are versus what they claim to be. Back in the 1980s, Fidelity Magellan was one of the best-performing, fashionable investments of the time. Magellan was marketed as a large-capitalization U.S. stock mutual fund, but often held sizable positions in international stocks. If you were building a diversified portfolio around Magellan, you needed to account for this anomaly.
One of the most fashionable investments today might be liquid alternatives. There are now more than 100 ETFs and funds that comprise the liquid alternative universe. They appeal to investors by promising higher expected returns, lower volatility, and diversification. They have grown in popularity despite a generally poor track record. Returns over time have lagged against the broad stock/bond markets with higher volatility and higher expenses.
How to Secure Your Future
Fashionable or not, your investments should either provide a reasonable probability of higher expected returns or lessen your overall exposure to risk. When investment promises appear too good to be true, they usually are just that.
Almost a century of financial science can point you in the right direction for your investment choices. Don’t risk your financial future on fashionable investment fads. Stick with what’s proven to work over varying economic and market conditions. Start there. Ready for a real conversation?