Investment fads: proceed with caution
By definition, a fad is an object or behavior that achieves short-lived popularity then fades away.
Considering that investing is meant to be more of a long-term plan, you would think that it would be better to err on the side of caution and stay well away from the (investment) flavours of the month. Yet the history of the market is littered with investment fads—and people, by nature, are prone to follow the crowd.
Your students would probably call it FOMO (the fear of missing out).
You only have to look back at the dot-com era when everybody and their grandmothers were investing in tech stocks.
While it’s hard to imagine there was ever a time before streaming, downloading, or Googling; in the late 90s and early 2000s, the internet was just in its infancy stage. Investors of all ages and proficiencies saw this as the new frontier with a potential for mega-profits. So much so, that billions of dollars were poured into virtually any small technology-based business that promised the moon and had the share price valuations to match. In the end, however, most of these tech start-ups didn’t live up to expectations and wound up being completely unprofitable. Of course there were a few moneymaking exceptions, such as Amazon and the aforementioned Google. But more often than not, the fad bubbles burst—and for those who were still invested in the hype, that burst equals bust.
So, how do you avoid falling prey to the excitement of the latest investment fad?
“The key is being able to spot a fad for what it is,” says Educators Certified Financial Planner professional Darryl Martella. “Fads are typically characterized by an exaggerated enthusiasm. Take Cryptocurrencies for example. Similar to the dot-com era, there is an undeniable buzz to crypto that has taken the investment world by storm. And while there is a chance that some (of these Cryptocurrencies) will become profitable in the long-term, others will most likely disappear.”
Does that mean investors should stay away from fads altogether?
“Not necessarily,” continues Darryl. “Investing is a very personal thing and everybody has to weigh the amount of risk they’re willing to take on. Naturally, the higher the risk, the greater the reward if that investment ends up paying off—but if it doesn’t, it also means the bigger the loss. However, if you are an investor who is approaching, or now in retirement, then I would advise staying well away from fads at all costs. Because if things go south, you will have far less time to recover any losses.”
But what is it about investment fads that make them more risky than your run-of-the-mill stocks?
“Investing always comes with some level of risk, it’s the name of the game,” states Darryl. “But the thing about fads such as Cryptocurrencies is that they don’t have your standard stock market comparables to help investors make informed decisions—useful tools such as sales outlooks, revenue projections, and management track records. The value of a crypto coin depends solely on the hope that other investors will be willing to pay more for it in the future. But wishing and hoping is not exactly a practical way to approach investing.”
Darryl also reminds investors not to confuse ‘fads’ with ‘trends’.
“Whereas fads are all about buzz and hype in the now, trends offer greater perspective and opportunity for the long-term, as they typically gain momentum over time,” explains Darryl. “Plus trends offer the most valuable thing of all—performance history. This means a strong balance sheet with manageable debt levels, which is especially important when interest rates are on the uptick. Keep in mind that you should never invest in something based on past performance alone. Because while a particular stock might seem like an economically-sound investment option, it doesn’t necessarily mean that it’s the right option for you, or that past performance will be repeated.”
The most important piece of advice Darryl recommends in addition to staying focused on the long term is always remembering to diversify.
“For younger investors just starting out, ‘the long-term’ might seem—well, a bit too long. But slow and steady really does win the race,” says Darryl. “That’s not to say you have to stick to being safe altogether. If you want to take a chance on a fad in hopes that it will pay off, then by all means, go for it. Just don’t make your portfolio solely about high-risk investments. This is where the importance of diversification comes in. Staying diversified across a wide range of asset types and sectors will help to minimize the overall impact on your portfolio, should things take a downward turn in one area.”
A few final tips regarding investment fads:
- Remember there is no such thing as a ‘sure thing’ — so keep this in mind when considering investing in the latest fad
- Be a knowledge-based investor — which involves going beyond the fad to determine if there is actual substance beyond the hype (this will involve doing a bit of research and enlisting the help of a professional)
- Be patient by investing for the long-term (at least 5 years)
- Remove emotion from your investment decisions, because excitement and fear are two sides of the same coin (which can lead you to make the wrong decision)
In the end, investing fads come and go, but sound, educator-specific investment advice never goes out of style.
That’s where Educators Financial Group comes in. We’ve been helping education members to navigate their investment portfolios through many passing fads over the years. So, regardless of where you are on the pay grid, how close you are to retirement, or if you’re already collecting pension income—we’ll make sure you’re equipped with the information you need to invest with confidence.