Back in 2013 I wrote about how dangerous many of the new products on Wall Street are. I said this about XIV, an inverse volatility fund:
But you have to be very careful about the latest fads and trends. Some of the funds that have been created in the last 5 years since the crisis have been downright dangerous if misunderstood. Funds like these VIX funds, many of the commodity funds with futures roll issues, the 3X funds, etc. The moment where it struck me as a bit overboard was when I was reading the Prospectus of one of these VIX funds and it warned:
“The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.”
Good lord. If you have to write those words in a Prospectus that no one except me and a few other nerds will read, then why even bother. You have to be very careful buying into Wall Street’s latest fad funds.
Here’s an update on that fund:
No, that’s not the white axis you’re seeing on the right. That’s the complete loss of capital in the fund. From $140 to $4 in a matter of days.
Here’s the problem with 90% of the fad funds that come along – they’re unnecessarily complex. No one needs these leveraged funds or these volatility funds or most of the crap that’s being sold these days. But they’re marketed as these fancy sounding products and sold to us at high fees while taking advantage of our behavioral biases. Yeah, we all want to seem smart and sophisticated when we’re investing. But most of this is salesmanship masquerading as sophistication.
When it comes to asset allocation it’s always better to defer to simplicity. Stop searching for the optimal portfolio. It doesn’t exist and if it does you won’t know what it is before you buy it. So it’s better to settle for the appropriate portfolio rather than the optimal portfolio. The market’s fluctuations and your emotions that come with it will be more than enough to challenge even the best investors. Why make it more complex than it needs to be with all these unnecessarily complex vehicles?
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.