How and why to avoid chasing the latest investment trend

We have written before about the temptation and false sense of safety that comes from following what everyone else appears to be doing when it comes to investing, by putting your money in an investment that has just increased in value. That strong recent performance can make an investment look attractive. However, there are many examples to show that this strategy often does not work.  

The latest example is cryptocurrency, which has seen substantial inflows into the various structures in recent months, after the extraordinary rise in prices. In the last few weeks, we have seen the values of many cryptocurrency assets falling by around 50%.  This doesn’t mean this investment type is good or bad, it is an example of a newer investment that saw many people invest into it after it had already strongly increased in value.  

We will explain here why chasing the latest hot investment is not a good strategy, and what you should be doing instead.

There are a number of elements we incorporate to help clients achieve their long term objectives that are much more effective.

1) We get the risk level and market volatility levels just right

Many of our clients and those that have attended our webinars will have heard us say that we advise clients to take the lowest risk necessary to achieve their goals. We need to align your risk profile and your targets. If you are in an investment that is too conservative, you will be frustrated at a potentially missed return. If we position your investment too aggressively, you may be stressed and worried about too much market volatility exposure.

Therefore, we adopt the level that is right for you, and actively manage and re-assess over time.

2) We preach and practice diversification

When setting out an investment plan to help our clients achieve the returns they need, we diversify investments to reduce overall risk, to limit exposure to any one asset class or sector, and to smooth out the more extreme market movements. With proper diversification in place, when one section of the economy is performing less well, for example, commercial real estate during the coronavirus lockdown, other sections of the portfolio can provide stronger returns, eg investments relating to technology and healthcare. Diversification occurs between asset classes, meaning shares, property, fixed interest or bonds, cash, alternatives, and within asset classes: growth stocks, tech stocks, value stocks, financial stocks. It also occurs across markets: Europe, US, Japan, UK, emerging markets etc.

Spreading your investments, should reduce your risk and volatility.

3) We advocate dynamic rebalancing

This is important at all times and is especially so during more volatile markets such as we saw in the first half of 2020. When markets move, either dramatically in a short period of time, or gradually over a longer period of time, your portfolio can move out of balance with where you want/need it to be. If the market falls you can find yourself too conservatively positioned and miss out on some of the returns from the subsequent growth. In the same way, when a market rallies, if you don’t dynamically rebalance, your portfolio can become too aggressive leaving you too exposed. Dynamic rebalancing keeps you on track and where your investments are supposed to be.

4) We never chase the next or the last big thing, especially last year’s top performer.

Put simply, don’t try and chase last year’s (or last month’s) top performer. If that particular investment was an attractive proposition, its value is probably now priced in. If you are reading about it in the press or on one of the social media investment groups, it is probably too late. This can be shown in the Callan Periodic Table of Investment Returns. They have been doing this in the US for the last 20 years and can show that the investment that is top in one year is rarely so the next year. In some cases, it is even the worst performer the following year.

(Reference: https://www.callan.com/periodic-table/)

What does all this mean?

For us, it means that you should remain diversified, don’t chase the latest investment, and, most importantly, stick to your goals. Remember why you are investing in the first place and what you are trying to achieve. Sticking to your plan and following the four points above will help you to stay on track and to get there. 

If you want to talk about your investments, get advice, or just a second opinion, contact us at info@blackswancapital.eu and we will be happy to speak with you.