The investing public is always being seduced into the latest investment fad because the people who invent these things have incredible marketing machines behind them. The two primal emotions of fear and greed are always present to get in the way of our better judgment. When we think we can make a free buck, greed will overcome any nagging doubt or fear we may have. In short we can always be seduced by the prospect of a sure thing.
Who are the masterminds that create these investment products?
Does this sound like a good thing to you? Some Wall Street portfolio guy, in an effort to get noticed, comes up with an idea. He brings in a bunch of his buddies to build an investment vehicle around it; they get (pay) a bunch of academic brainiacs to say that the theory makes sense; they market the hell out of it as the next great thing to hit the investment world; the financial press rallies around genuflecting to the creators; we happily pour in our hard earned dollars hoping it will be our lottery ticket.
Sound far fetched? Unfortunately, all too often, this is the way things happen. Many times these new investment products start out showing great returns which just adds to the fervor. The financial pundits jump on board. All that’s left is for those that don’t want to be left out in the cold to throw their money on the pile. Then, as is usually the case, the bubble bursts.
This is the life cycle of many can’t miss investment products.
We should know better but we don’t. Many of these strategies will only work in the market conditions they were developed. Very often these investment products are released to the market with little or no real world results. Just a theory, based on theoretical returns, under perfect conditions. When the market conditions change, and they always will, these new wonder investments cease to work.
Remember the dot-coms. They were such a sure thing that we were told we were now operating under a new economy where the old laws of economics no longer applied. And how about the leveraged debt instruments tied to the sub-prime mortgage market that led to the financial meltdown of 2008. These were supposed to reduce risk! After all, what was more of a sure thing than the housing market? At least that’s what the experts told us.
The investment world is littered with strategies that were all the rage until the inevitable progression of the market cycle slapped everyone back to reality leaving the unsuspecting public taking the hit to their nest egg. Could robo-investing and target date funds be next? They are certainly the darlings of today. The robots are untested in anything other than a bull market and target date funds didn’t perform as advertised during the financial crisis, much to the horror of many investors.
What happens to these can’t miss investment products when the music stops? Ask yourself that the next time the big investment firms and the financial media start the buzz about the next big thing.