Weekend Reading: Distracted Investors Edition

It’s easy for investors to get distracted away from their primary goals these days. Bitcoin is already up 94% year-to-date. The ARK Innovation ETF (NYSE: ARKK) has posted returns 19.45% so far this year. Meme-stock darling GameStop (NYSE: GME) is still up 133.68% on the year even after its historic rise and fall. Clean energy stocks and ETFs, while stumbling out of the gate in 2021, have soared year-over-year, including the Invesco Solar ETF (NYSE: TAN), which has eye-popping 1-year returns of 171.38%.

ETF providers are tripping over themselves to capitalize on the cryptocurrency, clean energy, and technology frenzy. Earlier this year, BMO launched a suite of ‘disruptive innovation’ ETFs to try to mimic ARK’s success. BMO, Horizons, and iShares have introduced more clean energy products to their line-ups. Finally, this week saw the emergence of Canada’s first (and second) Bitcoin ETFs from Purpose and Evolve.

It’s like the explosion of mutual funds all over again. Shiny new objects everywhere!

So, why not throw some play money into these sectors, as many of my readers and clients have done? 

Emotional robot investors like me aren’t swayed by shiny things. I’m fully invested in Vanguard’s VEQT across all accounts. Over the past year I’ve posted ho-hum returns of 18.31% in my TFSA and 14.32% in my RRSP.

Sure, those returns pale in comparison to some of these exciting new products and asset classes. But I’m not investing for the best 1-year returns. My low cost, broadly diversified portfolio is designed to give me the most reliable outcome over the long-term.

Besides, we know how this ends. A stock, ETF, or sector outperforms by a wide margin over a short period of time. Assets pile in as investors chase past performance. The stock, ETF, or sector then fails to continue the strong performance and reverts back to the mean. Rinse and repeat forever.

The last investors to get in typically get burned. We’ve seen this with oil & gas stocks, with cannabis stocks, with dot com stocks, with bio-tech and pharma stocks. It’s the same story.

Forget the notion of this time it’s different due to a technological revolution or paradigm shift. Railway mania was followed by a railway bust. The roaring 20s ended in the Great Depression. The infrastructure boom of the 1980s was followed by several busts. And the surge of IPOs in the internet bubble ended in a crash. This time isn’t different:

I don’t personally allocate ‘play money’ to my investments, but I understand why investors might want to. If you can’t resist the urge to play the markets, do yourself a favour and design some rules around this behaviour. Rules like allocating no more than 5% of your portfolio to play money. Have a “sell” target price to deal with your winners and losers so you know when to take profits and when to cut your losses.

I know it’s an exciting time to invest when seemingly everything is going up, including these shiny new products. You feel like an idiot holding a boring portfolio of index funds while investing newbies are striking it rich.

But ask yourself, do you want to be the greater fool who is willing to pay the highest price before a crash? We don’t know how long it takes for a bubble to burst, but we do know that it will burst eventually. Growth stocks fizzle out when earnings disappoint. Star fund managers fade when their assets become too large to maintain their advantage.

As for Bitcoin, well that story is still being written but the current price is more than 3 times higher than its last peak in 2017. That ended with a rapid 80% decline that took three years to recover. Maybe best to catch the next wave…

This Week’s Recap:

No new posts from me this week but I did want to share the winner of the Retirement Heaven or Hell book giveaway and the TurboTax free product code giveaway.

Congratulations to Dean, who commented on February 13th at 1:37 p.m. You’ve won a copy of Retirement Heaven or Hell.

And, congratulations to the following four readers who commented on my TurboTax Full Service Self Employed Review. You’ve won a free product code to try any of the three TurboTax Self-Employed products:

• Braden Bulmer
• Louie M
• Bruce
• Ashley

Thanks to everyone who entered to win these giveaways!

Weekend Reading:

Our friends at Credit Card Genius share the best instant approval credit cards in Canada – from no credit to excellent credit.

Here’s a great piece from Andrew Hallam about why he doesn’t include play money in his portfolio:

“If you want to play with money, spend it. Take a vacation. Buy something for a friend. Enjoy an activity you’ll never forget. That’s where “play money” should go.”

A Wealth of Common Sense blogger Ben Carlson shared 12 things he reminds himself of when markets go crazy.

Who really traded GameStop stock? And what happened to them? Wealthsimple digs into their own client data to find out how traders behaved.

Morningstar’s Ruth Saldanha with a great reminder to stay away from Group RESPs. I couldn’t agree more.

Most robo advisor platforms offer socially responsible investing options. The Corporate Knights blog looks at how green are your “responsible” robo advisors?

Are you sitting on a pile of travel rewards points? I know I am. Travel expert Barry Choi explains why cashing in your travel points now may not be the best deal.

I loved this post from Jesse Cramer of The Best Interest blog. He looks at something called bimodal spending, which asks you to say either “hell yes!” or “hell no!” to major expenses.

Speaking of spending, Michael James on Money looks at which accounts you should spend from first in retirement. His approach closely resembles what I recommend for my clients. Start with your non-registered money, but also spread out your RRSP withdrawals over a longer period of time (rather than waiting until age 72). TFSAs are last in line, and hopefully you’re still able to contribute to your TFSA to build up your tax free assets.

Here’s Ben Carlson again with the biggest difference between now and the dot com bubble.

And, here’s Andrew Hallam again on how wildly successful investments can also become a curse.

Finally, a spirited debate on advisor fees and whether a 1% assets-under-management fee is overcharging investors versus an hourly or pay-as-you-go fee:

New data by Kitces shows a comprehensive financial plan cost $2,500 when paid for stand-alone.

The average AUM fee on $1M is 1% or $10,000 for a plan and portfolio mgt (PM).

Vanguard, Betterment, Wealthfront charge 0.25% to 0.3% for PM only.

1% AUM is 100% overcharging! pic.twitter.com/8IdcPYYyaC

— Rick Ferri (@Rick_Ferri) February 8, 2021

The discussion came out of this new research from Michael Kitces on financial advisor fee trends.

Have a great weekend, everyone!