In her latest article titled – ARKK: An Object Lesson in How Not To Invest, Amy C. Arnott, CFA at Morningstar provides some great lessons for investors from Cathie Wood’s ARKK. Here’s an excerpt from the article:
While ARKK’s story isn’t over, its latest chapter contains some lessons for investors.
- Triple-digit returns don’t repeat. As we’ve pointed out in the past, it’s highly unlikely for any fund to continue posting chart-topping returns year after year. Funds can typically rack up gains of 100% or more only by making concentrated bets on individual stocks in the market’s hottest sectors, which usually means taking on nosebleed levels of valuation risk. That often leads to sharp losses when market trends reverse course and valuations drop to more realistic levels.
- Risk matters. On a related note, it’s impossible to generate high returns without taking on high levels of risk. As I wrote in a previous article, ARKK’s portfolio courts extreme levels of risk on almost every type of fundamental metric, including concentration, momentum, liquidity, valuation, and financial health. This high level of risk makes it imperative for shareholders to fully understand what they’re getting into before climbing on board.
- Consider dollar-cost averaging. Dollar-cost averaging often gets a bad rap because it typically leads to lower total returns. That’s because equity market returns are positive more often than not, so keeping any money on the sidelines is generally detrimental. But we’ve found that in practice, dollar-cost averaging can help improve investors’ results because it helps enforce discipline and avoid the pitfalls of bad timing–namely, buying in after a huge runup and selling after a decline. That’s especially true when it comes to highly volatile asset classes and funds, such as ARKK.
Overall, the gap between shareholders’ actual returns and reported total returns underscores the perils of getting caught up in the hype of funds with high-flying returns, which usually leads to disappointing results.
You can read the original article here:
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