avoiding_common_investing_mistakes

Investors tend to buy after periods of good performance and sell during drawdowns.

This behavior is evident in the fund flows of the ARK Disruptive Innovation ETF, where most investors bought in after the fund's performance peaked in 2020.

Why: This behavior is driven by emotions and a lack of understanding of investing principles.

"They do this by buying after periods of good performance and panicking and selling during drawdowns."

Chasing returns is a mistake that can lead to poor investment outcomes.

Research shows that investors who chase returns tend to underperform the market, as they buy high and sell low.

Why: This is because chasing returns leads to a focus on short-term gains rather than long-term wealth creation.

"A paper by Dahlbahr Inc. showed that over a 20-year period the S&P 500 returned just over 6% a year, but the average equity fund investor achieved a return of only 4.25%."

Investing in sector funds can be risky, as they often have concentrated positions in smaller companies.

The ARK Disruptive Innovation ETF is an example of a sector fund that has had concentrated positions in smaller companies, which has led to significant losses for investors.

Why: This is because sector funds are often more volatile than diversified funds, and can be subject to significant losses if the sector experiences a downturn.

"One vulnerability in ARK's model is that the ETF often has very concentrated positions in smaller companies."

Illiquid investments can be dangerous, as they can be difficult to sell during times of market stress.

The story of Neil Woodford's equity income fund is an example of the dangers of illiquid investments, as the fund was forced to suspend trading due to a surge of investor redemptions.

Why: This is because illiquid investments can be subject to significant price volatility, and can be difficult to sell quickly enough to meet investor redemptions.

"The UK markets regulator, the FCA, said at the time of the suspension that a fifth of the fund's assets were in extremely illiquid assets, many of which did not trade at all."

Investors should be cautious of funds with high fees, as they can eat into investment returns.

The ARK Disruptive Innovation ETF has a management fee of 75 basis points, which can be significant for investors who are not aware of the fees.

Why: This is because high fees can reduce investment returns over time, and can make it more difficult for investors to achieve their financial goals.

"The management fee is 75 basis points, so fees would have been under $15 million on that asset base."

Investors should avoid investing in funds that have a cult-like following, as this can lead to poor investment decisions.

The ARK Disruptive Innovation ETF has a cult-like following, with many investors blindly following the fund's manager, Cathie Wood.

Why: This is because a cult-like following can lead to a lack of critical thinking and a failure to consider alternative perspectives.

"By getting involved in social media and freely sharing Ark's research, Wood developed a cult amongst a younger audience of investors."

Investors should be cautious of funds that make bold predictions, as these predictions may not come true.

Cathie Wood made bold predictions about the valuation of companies in the ARK Disruptive Innovation ETF, which have not come true.

Why: This is because bold predictions can be a sign of overconfidence, and can lead to poor investment decisions.

"She predicted that her ETF would generate annualized returns over the next five years of 50%, something that has only been achieved by one registered investment company since records began."

Investors should consider the long-term implications of their investment decisions, rather than just focusing on short-term gains.

The ARK Disruptive Innovation ETF is an example of a fund that has had significant short-term gains, but has also had significant long-term losses.

Why: This is because focusing on short-term gains can lead to a lack of consideration for the long-term implications of investment decisions.

"A gain of 150% on $2 billion, followed by a loss of 70% of $60 billion is just not a good thing."