Beware of Hot Investment Trends
The world is awash in liquidity, which has put investors all over the risk curve.
For instance, 2021 was a solid year for major U.S. and global indices, but there were plenty of investment traps and dead-ends to navigate. The “meme stock” and SPAC craze early in the year blew out by mid-summer. An index tracking SPACs was down -33.1% from its mid-February peak and -15.3% for the year.1 In the traditional IPO world, of the 384 companies that went public in 2021, 255 ended the year trading below their offer price.2 Cryptocurrencies were boom-bust, and investors poured millions into the emerging, highly-speculative digital art market (via non-fungible tokens, or NFTs). Many investors likely took chances at just the wrong times.
The excess capital sloshing around markets in 2021 may ultimately represent the year of ‘peak liquidity’ in this cycle. But that doesn’t mean the heat chasing and hot investment trends are over.
In 2021, IPOs (including SPACs) raised over $300 billion, which was almost double the previous record set just the year before. Ditto for private equity, which saw investors pour $93 billion into early-stage and ‘seed-stage’ startups. In 2020, the money raised was closer to $52 billion.3
“Don’t put all your eggs in one basket.” It’s a classic proverb, and for good reasons. Diversifying your portfolio is one the most basic pieces of investing advice—but unfortunately, it’s also advice that too many investors ignore.
Zacks Advantage would like to help you ensure that your investments are properly diversified so that you can avoid the risks of over-concentration in any particular asset class. That’s why we’re offering our free guide, Is Your Investment Portfolio Actually Well-Diversified?4
Act now to get the basics of diversification, including:
- Why the average investor’s returns lag behind almost every investment category
- 4 myths of a diversified portfolio
- How to create a truly well-diversified portfolio
Many of the companies raising millions and hundreds of millions of dollars do not even have a product or a staff – just a big idea. In previous years, most new capital flowed to later-stage private companies or those with proven business models and cash flows.
In our view, there is enthusiasm in the investor community to move further out onto the risk curve in hopes of bigger returns. That may be good news in a sense – it means some of the growing froth is happening in smaller corners of the market, and the euphoria has not carried over into every asset class. The weak performance of IPOs and SPACs is also a signal that a bubble may not be forming – at least not yet.
Even still, all of the risk-taking seems destined to lead to more volatility, and we wouldn’t doubt if a bubble burst in very targeted areas of the market—like high-flying tech stocks with little-to-no earnings. But as mentioned, these “hot areas” do not appear to make up a large percentage of the overall market.
Our overall message to readers here is to beware of hot investment trends and think twice about participating. Many investors are trading on speculation, over-concentrating in trendy positions, and committing too much of their liquid net worth to short-term trading. There is a long history of this type of enthusiasm/risk-taking leading to major losses.
Bottom Line for Investors
The more we see trends like “meme stocks,” SPACs, and NFTs, the more we are inclined to double-down on quality and diversification. The temptation of triple-digit gains with just a few trades – and the ‘fear of missing out’ that many investors feel when they see get-rich-quick stories – often lures even the most disciplined investors to get in on the action. Doing so goes against what it means to be a long-term investor, however.
Most investors can get where they need to go over the long term by owning a diversified portfolio of stocks and/or ETFs. Positioning a portfolio across sector, style, size, and country will almost always provide exposure to the best performing areas of the market while minimizing the impact of the weak performing areas of the market. Volatility gets smoothed out over time, and an investor can earn attractive equity-like annualized returns. It doesn’t have to be more complicated than that, and investors don’t need a huge win in a single stock or IPO or SPAC to get there.
In fact, “diversify your portfolio” is one the most basic pieces of investing advice. Sadly, in our experience many investors still put all (or most) of their eggs in one basket.
At Zacks Advantage, we strive to help every investor properly allocate their assets. In fact, we’ve put together a helpful guide to help you understand the basics of portfolio diversification, including:
- 4 myths of a properly diversified portfolio
- Why the average investor’s returns trail almost every other investment category
- How to create a truly well-diversified portfolios
Get our free guide, Is Your Investment Portfolio Actually Well-Diversified?,5to learn how to create a truly diversified portfolio.
4 Zacks Investment Management may amend or rescind the Diversification Guide offer for any reason and at Zacks Investment Management’s discretion.
5 Zacks Investment Management may amend or rescind the Diversification Guide offer for any reason and at Zacks Investment Management’s discretion.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss
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