Déjà Vu All Over Again

“Wild Week Leaves Investors Reeling” is the front-page headline of today’s Wall Street Journal. After remarking on the week’s “sharp plunges and euphoric rises,” it goes on to rhetorically ask: “What is behind the remarkably sudden swings in the market?”

February 2019 Investment fads are nothing new. When selecting approaches for their portfolios, individual investors searching for “better returns” are often tempted to seek out the “latest and greatest” investment opportunities they are seeing or reading about in the popular media. Over the years, many approaches—more recently using “low cost” index, “smart beta” or exchange traded funds—have sought to capitalize on economic developments such as the perceived relative strength of geographic regions or countries, technological changes in the economy, or the popularity of different natural resources. But serious investors planning for long-term goals like retirement should be aware that that the influence of short-term trends may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a new marketing idea every week.”


Looking back at popular investment fads over recent decades can illustrate how often trendy investment themes come and go, along with investor money and their hopes. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or novel trends with clever names have come into and fallen out of vogue. In the 1950s, the “Nifty Fifty” were all the rage. In the 1960s, “go-go” stocks and funds piqued investor interest. Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of emerging information technology and telecommunication services. With the “Tech Bust” we all know how that turned out. During the 2000s, 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular. In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded. As investors reached for yield in a low interest-rate environment in the following years, other funds sprang up that claimed to offer increased income generation for those taking increased credit risks, and new strategies like unconstrained bond funds proliferated. More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” stocks and concentrated exchange-traded funds with catchy ticker symbols have also garnered inordinate attention among investors and gathered huge sums of speculative money that once again is not turning out so well.


Unsurprisingly, however, numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of dispersed information and drive it into security prices. Any individual trying to outguess or out-smart the market by constantly trading in and out of what’s hot today is competing against the extraordinary collective wisdom of millions of buyers and sellers around the world who set prices. With the benefit of hindsight, it is easy to point out the fortune one could have amassed by making just the right call on a specific industry, region, or individual security over a specific period or time. While these anecdotes can be entertaining, there is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it. We often hear about winners, but rarely about losers. It is important to know that most investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Of the 1,622 fixed income mutual funds in existence at the beginning of 2004, only 55% still even existed at the end of 2018. Similarly, among equity mutual funds, only 51% of the 2,786 funds available to US-based investors at the beginning of 2004 endured. The survival results of the exploding number of cheaply-traded ETFs are not any better.


When confronted with choices about whether to add additional types of stocks, funds or other assets to a portfolio, it may be worthwhile to ask the following questions:

  • What is this change claiming to provide that is not already in my portfolio?
  • If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal more reliably?
  • Am I comfortable with the range of potential outcomes?
  • Do I know what they may be if something goes wrong?
  • Will this change improve my investing confidence or my peace of mind?

If investors are left with serious doubts after asking any of these questions, it may be wise to use caution before proceeding. Within equities, for example, the basic market portfolio of many index funds offers the benefit of exposure hundreds or thousands of companies possibly doing business around the world (depending on your selections) and possibly broad diversification across industries, sectors, and countries. While there can be good reasons to deviate from a market portfolio—perhaps tilting toward dimensions of size, value or profitability as we recommend—investors planning long-term outcomes should understand the potential benefits and risks of doing so. In addition, there is no shortage of things investors can do to help contribute to a better investment experience. Working closely with a knowledgeable CFP® professional can help individual investors create an integrated plan that better fits the needs, values and risk preferences of their families. Pursuing a globally diversified approach without U.S. familiarity bias; managing expenses, turnover, and taxes; and staying disciplined through market volatility and positioned to see market declines as opportunities not to be feared; all can help improve investors’ chances of achieving their long-term financial goals, and gaining greater peace of mind through a professional wealth management process.


Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research grounded in the science of capital markets and smart flexible implementation may be the most reliable path to truly capturing the potential of what global capital markets have to offer.

CFP® professionals are fiduciaries with a duty of loyalty and care, and individually licensed by the Certified Financial Planner Board of Standards. Source: Dimensional Fund Advisors LP. Past performance may not be indicative of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. There is no assurance that any investing strategy will be successful. Diversification does not eliminate the risk of market loss. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to a knowledgeable financial advisor or CFP® professional prior to making any investment decision. Eugene Fama and Kenneth R. French are members of the Board of Directors of the general partner of, and provides consulting services to, Dimensional Fund Advisors LP.