December 5, 2017

Stop Chasing the Latest Investment Trends

Looking Around

The financial media is drawn to catch phrases, acronyms and buzzwords that can be sold as the hot new thing – FAANG (Facebook, Apple, Amazon, Netflix and Google) being the latest of these. Journalists, commentators and marketers use acronyms like FAANG because they fit easily into headlines, and many investors follow along and work to match their portfolios to the spirit of the age.

But investment trends come and go. This is not to downplay the possibilities these new technologies and their accompanying stocks present. But as an investor, it is wise to keep in mind that all those hopes and expectations are already built into the price of stock. FAANG, for example, has become particularly popular in 2017 as returns of these five companies have far outpaced the wider market.

So, does this mean, as some media gurus suggest, that you should reweight your portfolio around the hottest new trends? Probably not.

Looking Back

In the 1960’s, the “Nifty Fifty” was the hot new thing. It was comprised of a solid core of buy-and-hold blue-chip stocks, including such names as Xerox, Eastman Kodak, IBM and Polaroid. Eventually, all of these companies were disrupted in one way or another by newer, more nimble, competitors in the following decades.

By the late 1990’s, the dot-com craze was in full swing and the media was cranking out story after story featuring people who got rich from buying any stock that was an internet company. But looking back, who remembers the retailer, Boo.com? Or the prototype social network, TheGlobe.com? Or that great pet supply company Pets.com? Probably none of you since they all crashed and burned alongside many other dot-coms at the time.

Fast forward a decade to the mid 2000’s when the focus turned to companies with a large exposure in the so-called BRIC economies – an acronym for the fast-growing emerging economies of Brazil, Russia, India and China. Yet, when the world market crashed in late 2008-early 2009, the emerging markets were hit the hardest and took years to turn around.

Looking Forward

So while individual sectors can have their day in the sun, it is not clear that weighting your portfolio toward an industry currently in favor is a sustainable long-term strategy. Because no one can predict the future, a better approach is to diversify. That way, you increase your odds of being positioned in the next big winning sector without chasing hot trends or latching on to cute-sounding acronyms. Win! Win!