Over the past few months, I have kept coming back to this quote I heard:
“An idiot admires complexity, a genius admires simplicity.”
I think it is so relevant to the current environment. Nearly every single day, my inbox is piling up with offerings for “alternative” investments. There are just so many options to add complexity to a portfolio right now.
Even in the ETF space, there are filings for new ETFs pretty much every single day! One of my friends, Todd Sohn, covers ETFs at Strategas. On Friday, he mentioned that nearly 75 different 3x/5x leveraged ETFs were filed for. Some of the companies these ETFs will track have not even gone public yet.
I think my main issue with a lot of these products and alternatives is that they can really cloud judgment for younger investors. I see two main potential problems for young investors in this environment. Each of these problems can lead to more issues.
Analysis paralysis:
There are currently more ETFs than there are actual stocks. They offer tons of different solutions for all types of market exposure. I’ll leave a few different types below:
Leveraged
Inverse
Synthetic income (options strategies)
Dividend focused
Actively managed
Sectors
Thematic
That is not an exhaustive list right there. There are many more ETFs to choose from. This leaves individual investors to try and decide which ones will be suitable for themselves.
With such an abundance of options, I wouldn’t be surprised to see investors become overwhelmed and resort to just not investing outright.
I think I have made it quite apparent that I am a big believer in buy-and-hold, diversification, and index-based, risk-adjusted portfolios.
With so many enticing options in the ETF space, young investors may be more inclined to add some complexity to their investment stack.
Just don’t be convinced that complexity is necessary. Building wealth takes time. I don’t believe there are many shortcuts. Rather than spending time analyzing one of 4,300 ETFs, I would try to focus on things that move the needle, such as growing income.
FOMO:
Some of the sales pitches for these alternative products can make you feel like you’re missing out on something entirely.
We are seeing this with clients as well. Private investments are really hot at the moment. We’ve even had some people explain that all of their colleagues are interested in these “private” investments.
With more access to these investments than ever, people may think they need to begin investing in these asset classes.
However, private investments are usually not the focus for younger investors. Usually, young investors should be working towards understanding their cash flows, attaining the employer’s 401(k) match in full, and looking to slowly build up investment accounts in a risk-adjusted manner.
With it being the talk of the town, it is easy to begin feeling FOMO. Again, adding layers of complexity that you cannot fully understand can be a poor choice.
For those with a clear understanding of the offering and ample assets to afford themselves an “opportunity” position, it may make sense.
A genius admires simplicity. When I think of passive investing, I love the idea of simplicity.
Just because something is simple does not mean that it is improper. If anything, in the world of finance and investing, simple is generally a very good thing.
Additionally, just because something is simple does not mean it will be easy to stick with. Even basic portfolios are subject to market volatility. But the simplicity may make it easier to weather the storm when markets get volatile.
Consistently allocating to a risk-adjusted portfolio may not be nearly as sexy as a sleeve of alts, private equity, or private credit, but these simple investments have generally done well in building wealth over long periods of time.
This is for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.