Got a great tip on the next big thing? Before you jump in, take a moment to reflect on some of the investing fads we’ve seen before—and where they are now. Investing fads usually spring from some confluence of events that makes them seem like smart ways for the masses to make profitable investments. At such times, it can be tough to know the difference between investing and high-stakes gambling. But hindsight is 20/20. Let’s review some of the fads that still make us cringe:
1. Day Trading
Before the Internet, trading stocks meant calling a stock broker and placing your order, and probably paying a hefty commission as well. Getting prices meant scouring a daily investment newspaper, or maybe watching a new cable channel. No wonder the average person never thought about trading on a daily basis. But, with the boom of the Internet, all of that changed. You could get instant stock prices and cheap commissions. You could trade online without ever talking to a human being, and coupled with the budding dot-com bubble, being “right” was never so easy. It seemed everyone had an urban legend story about a cousin, friend of a friend, or neighbor who became a millionaire by day trading. This fad faded away after the popping of the dot-com bubble wiped out so many of those electronic accounts.
2. Internet Companies and IPOs
About the same time, there was massive investing fad in web-based companies. No earnings? No seasoned management team? No market? No problem! People thought everything would be different because of the Internet. At a time before Google and other Internet companies even figured out a way to make a profit on paper let alone in reality, companies rode Alan Greenspan’s “irrational exuberance” all the way to the top of the dot-com bubble. Companies would go public and their share price would double or triple on the first day alone, as long as they were web related. About the same time, mutual fund companies rolled out dozens of dot-com focused mutual funds, only to quietly close them a few years later. Anyone remember the book Dow 30,000? It might still be on the shelf at your library if you want an inside look at this fad.
3. The Latest Gadgets
People sometimes have a tendency to think that every new gadget is the next big thing. But for every iPod or iPhone, there are dozens of gadgets littering the investment wreckage graveyard. Sometimes, these are fads that burned out, other times they are companies that couldn’t make the transition from one-trick pony. Palm was one of the original standalone handheld device manufactures, but couldn’t make the leap to the connected mobile world, which, ironically, was dominated by Blackberry, before it had difficulty making the next transition. Beware the latest crazes. Which of the many wearables out there actually have a future, and which ones are just riding the current electronics fad?
4. Oil! No Gold! No Oil!
Investing in commodities like oil and gold are recurring fads. Certain investors love to rush to gold whenever anything negative hits the news. Oil investors follow a similar boom and bust pattern. Both of these are legitimate investments, but they can be tricky additions to your portfolio. Of course, like all fads, the rush into, and out of these investments has more to do with rumor and innuendo than actual facts.
5. Fix and Flip Real Estate
In the early 2000s, people were buying houses with no money down, holding them for six months and selling them for big profits, especially in hot markets like Arizona, Florida and Las Vegas. Housing prices don’t publicly rise and fall by the minute on an exchange so they often seem like they don’t go down. However, as unlucky real estate speculators found out in the so-called Great Recession (and before that in the 1990s) real estate prices can, and do, go down, sometimes dramatically. This fad went away when numerous investors and home owners were left underwater on their investments after the banking crisis of 2008 dried up easy mortgages and left them holding the bag on properties they couldn’t sell. Over recent years, the sporadic appearance of news items with titles like, “Has House-Flipping Made a Comeback?” would indicate that no, it has not.
6. Cute Names
Some of Wall Street’s oldest “wisdom” comes in the form of cutely named investment “strategies” that are wrong as often as they are right. Rhyming makes it true, right? How about, “Sell in May and go away?” This old saying suggests that the summer months are bad for the stock market. Does it work? Well, it might have seemed like a good idea this year, but not so good last year, and total loser in 2013.
The only investing style that works year in and year out is a solid, well-diversified portfolio designed with your goals and risk tolerance in mind. Otherwise, you may just be chasing the latest fad.