The trouble with trends

With so many pressures to think and act short-term these days, investors may need their financial advisors to remind them of the ultimate goal for their investment portfolio. As we experienced in 2008, market “noise” can trigger panic selling, and then later, impulse buying. Incentives for investment managers are increasingly aimed at short-term performance. Industry data seems to suggest that financial advisors are trading more frequently on some advisory platforms. And new products that come to market with the latest bells and whistles are often mere distractions for long-term investors.

The problem with all this short-term thinking is, it may not align well with your clients’ long-term objectives — college and retirement, for example. Those goals can take years, even decades to accomplish. Having recently attended the college graduations of my fourth and fifth children, I can tell you that one of the best decisions I made early on was putting money away and giving it 21 years to grow.

And yet many investors are still quick to give up their current strategies, just because a different investment style comes into favor or a new source of return comes to market. But by the time investors jump on the latest trend, they’ve often already missed the strong performance and end up sacrificing opportunities in the strategies they’ve left behind.

We’ve all seen this happen, even just by watching the waves of investor money flow in and out of different fund categories from year to year and sometimes decade to decade. As we all remember in the late 90s, especially in the US there was a clear bias toward growth stocks for appreciation. Investors didn’t think value stocks would ever have a place in an account seeking long-term capital appreciation. And yet from 2000 onward, value stocks shifted back into favor, fueled by investor demands for better cash flow and less volatility. Looking at 2014 alone, while more than $70 billion flowed into foreign large cap blend funds, more than $40 billion flowed out of large cap growth funds.[1]

Attempting to time market leadership in other regions can also prove challenging. Tactical investors favoring emerging markets (EM) from 2000-2004 and 2005-2009 would have been well rewarded as EM stocks outperformed Europe, the US and Japan over these consecutive five-year periods. During the next five, however, EM posted the worst performance on a regional basis. Our concern is that the shifts in investors’ tastes are coming faster, most often driven by performance leadership. There seems to be a mentality of investing more for the moment than through the market cycle.

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