There is a difference between fashion and style. Even in the investing world, trends come and go. There seems to be a new fashionable strategy with every market cycle. However, core themes such as risk management are always in style, no matter how markets are positioned.
Before my career in finance, I worked in the fashion and design industries. I saw firsthand how fleeting trends can be, as well as how those late to a trend sometimes lost out. Upon entering the financial world, it quickly became apparent that the same ephemeral nature can apply to both clothing and capital.
In this article, I’ll offer some similarities between the cyclical patterns of investment trends (fashion) and how advisors can guide their clients for the long term (style).
“Fashion fades; style is eternal.” —Yves Saint Laurent
Similar to Saint Laurent’s thinking, a well-rounded advisor could argue that alpha fades, but risk management is forever. The efficient market hypothesis states that everything is priced fairly and it is impossible to generate consistent alpha. However, the biggest investment players today, and your clients, may still be searching for new ways to beat the market and often are willing to take on more risk to do so.
The result? Flashy investment styles that might target ultra-volatile tech stocks and buzzy names, which could lead to temporarily outsized returns reminiscent of the dot-com boom and bust of the late 1990s and early 2000s. Alternatively, these investment styles could prove to be very ill-advised, akin to your dad wearing biker shorts and a neon headband out to dinner. Many other investors are keen to trade in such “fashion-forward” strategies for the classic Chanel suit of investing - indexing. While this could be an important part of your investment wardrobe, it may not fit every occasion.
As an advisor, you may want to avoid trendy, overzealous ways to generate gains and instead focus on the core fundamentals of portfolio management—including attempting to manage risk to prepare for any circumstance and addressing the foremost needs of the client. Behavioral portfolio theory offers a newer way of thinking about portfolio construction, leaning into the style of risk management and goal setting rather than the fashionable “alpha first, risk management later” trend.
“Trendy is the last stage before tacky.” —Karl Lagerfeld
Trends often hinge on the concept of a pivotal moment. Blue jeans were long considered taboo before they rapidly became a pillar of fashion around the world. Similar to denim, the pillars of investing occasionally make enormous shifts, and what is seen as standard one day can be moth eaten the next.
For example, plain vanilla bonds were long considered a safe-haven asset believed to offer investors stabilization, yield, growth and risk management. But I no longer believe they can deliver these benefits consistently given the current low-rate environment and threat of rising rates and inflation. Many investors and advisors have now pivoted to find other methods of securing these attributes in their portfolios like adaptive fixed income.
Market bubbles are constantly growing and imploding. An advisor may need to look beyond them and grasp the bigger picture.
“Create your own style. Let it be unique for yourself and yet identifiable for others.” —Anna Wintour
Style is a quintessential concept. Looking back decades, a suit and polished shoes were the standards for menswear. This core style has remained the same regardless of different fashions coming into trend, such as a wider lapel or higher waistband. In the same way, risk management has always been a goal and will likely remain top of mind for investors. There are just different methods of applying risk management solutions.