Illustration: Clker-Free-Vector-Images. Source: Pixabay
Bell-bottoms became fashionable in the ‘60s and ‘70s. They were featured in music lyrics, on TV shows, and in the movies. For a while, bell-bottoms were all the rage. Then they were replaced by skinny jeans, which gave way to the “grunge look,” which turned into hip-hop pants, which have been replaced now by athleisure wear. Today, you can’t find bell-bottoms anywhere – even if you wanted to – except as collectible vintage clothing.
I thought about bell-bottoms and fashion fads when I saw that over $1 trillion had shifted from active mutual fund strategies to passive indices, like the S&P 500. Different investing styles go in and out of fashion as their fortunes wax and wane. Before this latest move to indexing, we had “low-vol” investing, which emphasized large, stable companies with economic advantages – like consumer companies, pharmaceuticals, and utilities. People always need to eat and use electricity, right? Before that, it was dividend stocks. Prior to that, it was the “dogs of the Dow” and value investing. Prior to that, you had to get some gold and go global – just before the dollar rallied and the Euro crashed.
Every style has its day – a period of time when conditions favor that approach. Then circumstances shift, and a new style outperforms. Indices are especially hard to beat when a few small companies grow to become huge. The past ten years have seen the rise of software giants like Facebook, Google, and Amazon grow from small start-ups to market dominance. A similar thing happened in the 1990s with Microsoft, Cisco, Sun, EMC, and Oracle – the darlings of the internet. Almost no one beat the index back then. After an amazing run, those shares languished, and index investing went out-of-fashion for a while.
There’s nothing magical about an index. It’s one investment strategy among several. Currently, a few big companies are dominant, most technology and banking firms. But ten years from now, it’s almost certain that today’ biggest firms won’t be the top performers.
Because nothing fails like success. Successful business strategies breed bureaucracy, complacency, and infighting, while competitors bring passion, energy, and innovation. The same thing happens with investment styles. There may be good reasons to change your investment approach, just like there were good reasons to hang up those bell-bottom jeans. But generally, the best time to change your style is when it’s working.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”