The financial media is not the only temptation investors face. They also face temptations from financial advertisers.
We are quite familiar with advertisements in publications such as the Wall Street Journal promoting a 5 Star Rated fund. Or how they have been best in class. These advertisements are alluring and effective. The proof is in the fact that top rated funds attract significantly more money than other great (but not best) funds.
I believe the subconscious bias that drives “fund chasing” is the illusion of skill. Investors confuse a strategy that was lucky for a period of time with someone who is a better investor than others.
We also have trading programs that promote huge returns, and those could be even more alluring due to FOMO. Even I am allured by these…until I ask myself the right questions.
A Timely Example
Last night I was scrolling through my Facebook feed and saw an ad for Amplitrade. It intrigued me just to see what it was about. And then I saw the performance. You can see the images below to get an idea of what they were advertising. Understand that whenever we want something to be true, we often set aside our skepticism. You need to bring that skepticism back; it is essential or your client may end up making a big mistake.
There are two considerations that should help your client think clearly and correctly about the situation.
- Backtesting is irrelevant. Anyone can find a model that will fit well to the past, extremely well. I can backtest my marriage and find that I am the perfect husband. If someone is promoting a backtested strategy, the performance should be disregarded, putting into question the entire premise of the ad.
- If the strategy is so profitable, why would someone sell a subscription to copy it? Arbitrage and economics demonstrate that the more money in the same strategy (or the more competitors) will shrink margins. If XYZ makes so much money, it would behoove a rational individual to keep it secret and keep making money. Unless it is just a mirage and XYZ would make more money selling your clients a subscription to the strategy
As always, our job is to help clients see through the noise and focus only on what matters and what is TRUE.
Related: Improving Habits: Help Your Clients Develop Better Investment Habits