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:

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

Have a great weekend, everyone!

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6 Comments

  1. Gus on February 20, 2021 at 5:28 pm

    Thank you Robb for the timing of this post , I can’t agree more on everything you said and I’m guilty of being one of the FOMO who even though I consider myself a bit of conservative index investor I couldn’t help myself but to dip my toes into the new flavour of the year which is crypto although those ARKK etfs they’re not lagging behind on the hype , so I admit that I bought a blockchain stock which is HIVE two month ago about 500 shares and now I’m at 200% gain on that which is insane and so tempting to add more but I’m trying to hold on strong and not surrender into the temptation , I’m bombarded at work from my coworker who comes every day with a new penny stock that he made on it like 200 or 300% not to forget all the articles and the media that are praising these new technology , so yeah long story short thanks again for this article.

  2. Braden on February 20, 2021 at 10:40 pm

    Yay I won! First time ever. Been commenting for years. Is this the website version? How do I claim it?

  3. Kyle on February 21, 2021 at 6:38 am

    Just the post I needed to read, thanks Robb!!

  4. Gary on February 21, 2021 at 7:27 am

    Great post Robb. Watching these incredible gains by the crypto currencies I sometimes feel like I’m being left behind. Your post reminds me to be a steady eddy and stay the course. STAYWELL!

  5. Howard on February 21, 2021 at 10:13 am

    Hi Robb,
    Pretty hard in this environment to try to convince people that dividend investing is the best way to go. With markets generally rising anyone using a low fee stock broker platform feels like they finally have mastered this investing “thing”. I saw this back in the 90’s during the run up of the high tech bubble. Everyone at work was talking about their big gains over the last few months. Then when the bubble burst there was no more talk of stocks at work. Playing the buy low and sell high game is what the banks and financial advisors would like us to do. Always works for them, but we see everything go up and down with the inevitable market cycles. I know its not easy to accumulate enough stock to be able to retire on dividends, but I have managed and I credit this to a “slow and steady” approach to investing. Buying quality large cap stocks that pay a decent dividend is a stress free way to financial freedom. My fees are zero on my investments, and the discount broker better not count on me for his retirement, other than maybe a yearly adjustment to get things back into balance, he won’t be seeing any transactions from me. All I can say is that I’m glad to no longer be playing the buy low sell high game. For the vast majority of investors it doesn’t work in the long term, but it is great for the people who sell the products.

  6. Lou on February 21, 2021 at 7:40 pm

    Robb,
    What a great time to do a write up on betting on a hot horse.
    I’m with you and just sticking to broad base low fee ETF funds.
    VEQT is one that I have been using.
    Target date to retirement funds is another one that I like to use.
    My goal with my “poker money” is to place it in:
    large-cap blend stocks ( S&P 500 SPX)
    large-cap value stocks
    small-cap blend stocks
    small-cap value stocks
    Any ideas or amounts % in each?

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