The Risk of Hot Trend InvestingBy
“There is always an easy solution to every human problem – neat, plausible and wrong.” H.L. Mencken
“What do you think about investing in . . . ?” John, a client, asked me, naming the latest hot investing fad. “I’m concerned about the deficit and inflation. I’m thinking of selling some of my investments before they go down again and buying it.”
“John, I agree with you in part,” I answered. “In two to three years, unless the government unwinds the spending, we’re going to see inflation heat up. And the government is never good at unwinding programs they start. But that investment has a terrible long term track record.”
“What do you suggest, then?” he asked.
“Stay diversified and select carefully,” I responded.
“What should I do right now?”
“Nothing different. You’re well diversified with good money managers. We’re moving out of the recession and your portfolio is up significantly. You’re positioned well. Don’t upset your long term strategy trying to capitalize on a short term trend. We’ve had a good run and we will again.”
The allure of one, easy, sure-fire investment is great and an illusion. People want the one thing that will make them a pile of money and can’t fail. And many think you find it by looking at what is currently hot. Since it’s shooting out the lights today it’s sure to do well in the future. So they put all their money into it just in time to implode. What they have left they sink into the next “can’t miss” investment because now they have to make a killing. Then they lose half of what they have left.
Think about all the hot trends we’ve had just in the last ten years. More than enough to destroy your retirement savings if you got in or out at the wrong time.
So what do you do?
First, quit chasing the new hot dot investment. By the time it’s popular enough for you to know about it the run is about over. And when you get in late the early investors have made their money and gotten out. You’re left with the losses.
Second, invest smart. Either educate yourself on effective investing or hire someone to help you. It will cost you time and money either way. But in comparison to your losses that cost is miniscule.
Third, stay diversified. If you have an adviser that’s picking hot tips, be careful. I tell my clients, “I don’t know what the next hot trend is and I don’t think anyone else does either. But if I’m properly diversified I own it. I probably own some of the dormant ones also. But over the long run it evens out.”
People say, “But you will miss out on the spectacular winners.”
I answer, “That’s true. You’ll also miss out on the spectacular blow-ups.”
Want to reach your financial goals? Seek steady long term growth. You don’t need homeruns. Just lots of singles and doubles.
Will this keep you from having down years? No. I wish it would. 2008 and 2002 were both ugly years even for diversified portfolios. Sometimes everything gets hammered.
But over the long run the returns average out. And in the short run it helps protect against portfolios from completely melting down. And that steady long term growth helps you achieve your financial dreams.
“Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.” Ecclesiastes 11:2 (NASB)
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Douglas Armey, the LPL Financial adviser associated with this website, practices in Fresno, California and may discuss and/or transact business only with residents of the following states: California, Idaho and Oregon.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.