The Need for Serenity in Investing (2024)

Blame not the youth for their aversion to debt paper. Today’s youth have grown in a milieu that has made debt unattractive. Post-crisis, government’s debt papers, aka bonds, have rewarded investors with poor returns. This was for markets across the developed world. Worse, when interest rates climbed recently, young investors in bonds were saddled with suicidal piles of bond paper. The youth is in no mood to view bonds as safe investments suited for them.

Avoid Thematic Investment Fads

However, dislike for debt is not healthy. Particularly because bonds offer better yields now than they did in 2010. Plus, they are anytime better than holding idle cash, which allows inflation to erode purchasing power. Bonds do not come anywhere closer to equities by the yardstick of returns, but they are far better than holding unrewarding cash in vaults or savings accounts. Sure, outright dislike for debt is a mire the youth should avoid.

The other mire the youth should avoid getting in is on the terrain of mutual funds. Most funds offer what they call thematic investing opportunities. The funds promote their thematic schemes as if they are the be-all and the end-all in fund investing. The youth should steer clear of glitzily-advertised thematic investment products. Thematic funds are nothing less than marketing fad. Thematic funds are mires filled with slush.

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ETFs with Grandiose Themes

Asset management companies have been marketing their thematic products aimed at luring the youth away from exchange-traded funds, aka ETFs. These companies are working hard at diminishing the popularity of ETFs which seem to be catching up globally. There are ETFs for the asking today. Investors have now a wide variety of ETFs, investing in stocks of niche players, from fast-moving consumer goods to cannabis.

For the safety-minded, there are ETFs that invest solely in grandiose themes that hold the prospect of high growth and high returns. There are tech ETFs investing in stocks of only tech giants such as Google and Microsoft. Then there are ETFs investing in listed stocks of companies with firm footholds in the environmental-social-governance sector, aka ESG. Niche ETF funds are the flavour of the day.

No Guarantee Against Vicissitudes

Such niche funds have always been there. But the investment frenzy they are unleashing today is really new. This frenzy is a warning to the investing youth. They should realise niche funds hold not only promises of big returns, but also carry glaring shortcomings. ETF investors are known to get exposed to high volatility, less liquidity and heavy fees. Focusing only on the ETF is a lot worse than focusing on the whole market.

This sharp single-minded focus is almost certainly risky as ETFs whose fortunes fluctuate on the death of fads or decline of technologies can destroy your wealth. The sensibility of a concept or a theme is no guarantee against such vicissitudes. What is sensible today may become nonsense with the passage of time and evolution of new concepts, ideas and technologies. Even pet themes of star fund managers are bound to change.

Thematic Funds are not Thematic

This is why you should not fall for ads tomtomming ETFs with themes that are a rage today. Look long. Think far. Consider all possible eventualities. Do not get carried away by morality selling. What is marketed as ethical and moral today, may turn out to be otherwise tomorrow. ETFs investing in animal products for instance. Stick to your principle of investing for long in growth-oriented stocks. Thematic is being theatric, nothing more.

This is one major reason for going for non-thematic funds. Call them normal funds, if you want to. By opting for these funds, you will also be able to avoid hefty fees charged by them. Not just that. Look a little deeper into the portfolio composition of thematic funds, including the ESGs. For want of good thematic stocks, most thematic funds invest a lion’s share of their corpus in stocks that non-thematic funds invest in. Where then is the much-advertised product differentiation?

How does that make thematic funds thematic? How does investing as much as 70 per cent of the corpus in normal stocks make ESG funds thematic? This is hogwash. Why should you pay extra-large fee for investing in normal stocks? Almost always thematic funds fail to register significant growth in their net asset values and thus they end up as duds on the mutual fund terrain. Avoid these duds. Stay clear of them.

MoneyMire’s Last Word

Just because the markets look good and stock indices appear to be rallying non-stop, do not ignore ground rules and cardinal investing principles. Whether the market is bullish or not, whether the indices are on the upswing or not, do not compromise on due diligence. Invest long in good growth stocks. Develop healthy long-term investment habits. Do not get swayed by short-term fluctuations. Do not fall for fads. Period.

• theobjectivist07011961

• Blog
• December 11, 2023
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