We’ve all done it. Watch that stock, ETF, or mutual fund go up month after month until you can’t resist anymore and buy-in. Only to be disappointed when it performs poorly afterwards. Sound familiar?
Let’s look at a glaring example of this.
During 2020, the darling was ARK Innovation ETF (ARKK) which delivered a 152.5% return. Predictably, investors piled billions into this ETF after most of the gains were earned.
Almost one year later many, if not most of investors, are likely wondering what to do. The year-to-date return from January 1, 2021, to October 31 for the S&P 500 was 22.37% while during the same period ARK actually lost -2.58%!
This mistake happens again and again when investors chase returns from last year’s highly publicized darlings. I don’t know what’s going to happen to ARK in the future. It may provide stellar long-term returns, languish in mediocrity or worse. But that’s not the point.
The industry name for this is FOMO (fear of missing out). Unfortunately, people fall into this trap all the time and buy the wrong investment at the wrong time hoping to earn an inordinate amount of money very quickly.
Before buying any position for your portfolio it’s a good idea to ask yourself.
- How comfortable am I with the amount of risk?
- How does this fit into my investment strategy?
Think of it this way, most investments that are highly publicized are so because they have had a big run-up in price. In other words, someone else has already earned most, if not all, of the profit.
Best of the Season