Be it cryptocurrencies, electric vehicles or unproven technology, the most annoying thing about investors is their inability to stay away from “shiny new trends”, even when they know better, according to Vanguard LifeStrategy’s team.
Short-term trends repeatedly pop up in markets, sometimes driven by external, macroeconomic elements. For example, when Joe Biden was running for president, exchange traded funds (ETFs) full of stocks expected to do well if he made it into office sprang up, the so-called ‘Biden Basket’.
More recently, themes such as cryptocurrency and non-fungible tokens (NFTs) have piqued investors interests, much to the annoyance of some managers.
Mohneet Dhir, a multi-asset product specialist at Vanguard, said that the most frustrating thing about markets was how investors “always fall for the short-term trends. Always. No matter how many times history tells them that they really need to tune out the noise.”
She said that the cryptocurrency craze was the latest example “where people just fall for these short-term fashions”.
Her mother even approached her recently about Bitcoin, asking where she could buy some having been recommended to invest by a friend, despite not knowing what it was.
She said: “It really frustrates me when people don't think about the core questions like: Why am I investing? What is my time horizon? And what are the factors I can control to make sure I get more bang for my investments?”
This the mantra of almost the entire fund management industry, promoting a focus on the long-term and ignore the distracting market noise on the way. But, Dhir said, history repeats itself and investors forget this lesson and charge into the new idea.
Dhir works on the Vanguard LifeStrategy range, which make a deliberate choice to steer clear of these types of high-risk, unproven parts of the market.
Mark Fitzgerald, head of product specialism at Vanguard, added that one of the main concerns about investors running headfirst into these short-term ideas was not only could they lose their returns, but that the experience will put them off investing altogether.
He said: “Some of these products could really damage the trust between investors and markets, that's really the concern here.”
He admitted that some of these trends, such as cryptocurrencies, were “very interesting” but said that people should differentiate between where they put their “long-term investments, which pay for their retirement or lifestyle, and differentiate that from a smaller portion for these types of investments”.
This, he said, should be set aside and given the same odds of winning as if betting on the Grand National.
“Again, it’s not that these things are not interesting, but there’s so much rubbish out there and there are so many inflated claims. The danger is that a bad experience with those puts people off investing altogether, or from seeking any kind of financial help”.
The way to deal with these ideas, Fitzgerald said, is to provide more education about the risks attached to these types of short-term assets in the hopes that this would “kill off a lot of these products, which do not perform the way people think that they should”.