Paralysis By Analysis

While many people have recently said it has never been a better time to be an investor, one can also make the case that it has never been as confusing. Between index funds and mutual funds, hedge funds and fund of hedge funds, ETFs and ETNs, financial advisors and robo advisors, there is an overwhelming amount of options out there for investors.

Brian Portnoy’s hits the nail on the head in his excellent book, The Investor’s Paradox. He says :

“We crave abundant investment choices to meet daunting portfolio problems in a world of volatile markets, manic news flow, and shifting geopolitical rhythms. But the more choices we are afforded, the more overwhelmed, less empowered and ultimately less successful investors we potentially become. More is less.”

According to Portnoy, there were only 170 Mutual Funds in 1965. In an article this weekend, Barron’s claims there are now 538 smart beta strategies. This is unbelievable. There are more smart beta strategies than there are stocks in the S&P 500.

Perhaps even more disturbing, a new Frankenstein ETF was recently launched, “IFLY,” which tracks the Reality Shares Drone Index. This new fund includes companies that are “actively involved in developing, researching, or utilizing drone-related technologies and services as part of their business model.” Who could this creation possibly be targeting?  Phil Huber answers this perfectly; “this is for the investor who’s sick of chasing alpha in that crowded space and simply wants plain vanilla drone beta.”

There have been some wonderful developments over the last few years, but some of these advances are a double-edged sword. Technology has made it easier than ever for investors to shoot themselves in the foot, and in an environment where returns are hard to come by, the temptation to switch from product to product has grown exponentially. Unfortunately, many will succumb to this temptation. The successful investor, however, will not be distracted by the myriad of choices that will continue to come to the market.

Read the Investor’s Paradox

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