Why You Should Avoid Or Sell These Popular ETFs

by Andrew Hallam, Personal finance best-selling author

My friend, Malcolm, began investing about 30 years ago. He was attracted to only the best performing stocks and funds.

Some years were like multi-platinum Grammy wins. He often gained 200 percent or more. Sometimes, he increased his portfolio’s value ten-fold over just 5 or 6 years.

I’ve changed Malcolm’s name to protect his identity. And that’s a good thing because the story doesn’t have the ending you might think.?

Malcolm’s portfolio is worth about $500,000. It should be worth millions.

In many ways, my story and his are like the Tortoise and the Hare. I was the tortoise, Malcolm the hare. I built a multi-million dollar portfolio on a schoolteacher’s salary.

That doesn’t mean I didn’t make my own mistakes. In the early 2000s, I watched a friend make 54 percent per year for 8 years. I put some of my money where he had his. Neither of us knew it was a Ponzi Scheme until we lost it all.

I also bought technology stocks in the late 1990s. My money tripled fast, until the floor fell out.

It’s tempting to jump on a flying stock or ETF. It’s even more tempting when it has soared for several years. After buying it, it might even reward us for a year or five. But in most cases, reversion to the mean gives us a swift kick in the rump.

What is reversion to the mean?

Generally, stocks or funds that perform well during one time period rarely maintain their winning ways. More often, they revert from lovely swan to ugly duckling. For example, imagine it’s December 2019. You look at the US mutual funds that are among the top 25 percent of performers.

Most Americans buy from this group of funds.? It makes sense, right?

But how many of those funds maintained their top quartile ranking over the next four years?

Typically, between 2 percent and 6 percent are lucky enough to do it.? And over the following four years, most of those “winners” also fall into the dirt.

Four years after December 2019, none of the funds maintained their top quartile ranking. None.

We’re attracted to stocks and funds that “perform.” But past performance is a trap that typically costs us money.?

It’s what befell most of Malcolm’s stocks and funds over the past 30 years.

Do you know what he might have bought this year?

If you search online for “best performing funds in 2024” you’ll see the contenders that Malcolm might have scooped. The list includes what your cousin Joey and your boss, Maria, are probably buying now. That’s human nature. It’s just what we do.

The Cryptocurrencies Binance Coin (BNB) is up 82.8 percent for the year, to July 25, 2024. It jumped 104 percent over the past 3 years.?

Amundi’s MSCI Semiconductor’s ESG Screened ETF is up about 57 percent since January 2024. Over the past three years, it has almost doubled.

VanEck’s semiconductor ETF has soared 32 percent this year. Over the past three years, it’s up 89 percent.

Are you tempted?

Malcolm would have been.? But smart investing isn’t about chasing past winners. Nor is it about predicting the future. For the best odds of success, ignore investment news and the “best performing” funds. Build a globally diversified portfolio of ETFs. Add money whenever you have it, and stick to that plan.

That sounds boring. And you might think you can do better. But if, over your lifetime, you could pick stocks or ETFs that beat an index like the S&P 500, Forbes magazine would fight to get you on its cover.

The index whips most hedge funds and most college endowment funds. Over an investment lifetime, it crushes the dreams of almost every day trader.? Over the past 20 years, the S&P 500 index beat 97 percent of professional investors running actively managed mutual funds.

?Over the past 30 years, it beat more than that. Over the past 40 years, its dominance increased. Over the past 50 years, well…I think you get the point.

Why, then, do so many people believe they can do better? John Bogle, Vanguard’s founder, liked to say, “Hope springs eternal.” That’s why people flood casinos.

Investing in a consistent, diversified portfolio of ETFs provides the best future odds of success. Anyone deviating from that strategy might lose big and fast. They might earn huge returns for one year or ten. But the mathematics of the market, as explained by Economic Nobel Prize winner, William F. Sharpe is like a law of physics.

These days, Malcolm knows what he lost. If you bought a top-performing stock or ETF, it might be best to sell it. The market is relentless. It stalks and then pummels almost everyone with the gall to try to beat it.

How long is your investment horizon?

For most of us, it represents the time from now until our deaths. For those of us bequeathing funds, it’s longer than that.

Can you beat the market over your lifetime?

Overwhelmingly, the odds say No.

Andrew Hallam is a Digital Nomad. He’s the bestselling author Balance: How to Invest and Spend for Happiness, Health and Wealth. He also wrote Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.