By David Booth, Executive Chairman and Founder, Dimensional Fund Advisors
Every now and then we like to provide an update on some of the latest "hot" trends in finance and investing. They don’t fit our time-tested Value Added IndexingTM approach that utilizes low-cost diversified funds that track the markets, so we’ll avoid them.
But it may be interesting to see what your neighbor or co-worker is losing sleep over…
Digital or virtual currencies, stored on a decentralized technology platform called blockchain that manages and records transactions. While Bitcoin is the most well-known “crypto”, several thousand are in existence. Enthusiasts view Bitcoin as the currency of the future, with no central bank that can manage the amount in circulation. Pessimists point out buying Bitcoin is simply a form of speculation, as it doesn’t produce any cash flow, and investors are simply hoping someone will pay more for Bitcoin than they did.
Initial Coin Offerings. An ICO is the cryptocurrency industry’s equivalent of a stock initial public offering (IPO). A company looking to raise money to create a new coin, app, or service may launch an ICO to raise funds.
A process to increase returns on cryptocurrency buy lending digital coins to an “LP”, a crypto liquidity provider, who then can enable trading in the currency. You earn “interest” or “rewards” on the coins you have lent. You also risk having your digital wealth stolen or reduced by price volatility.
Non-fungible tokens. A digital asset that represents a “real-world” object, such as an artwork or video. An NFT lets the buyer own the original item with a digital “signature” – even though digital assets can be easily recreated.
Special Purpose Acquisition Companies. A SPAC is essentially a shell company set up to raise money through an IPO (initial public offering). The IPO proceeds are then used to buy a “real” company with existing operations. Investors in SPACs typically do not know what the eventual acquisition target will be.
Stocks such as GameStop or AMC Theatres that have seen rapid growth and attention on social media outlets such as Reddit and Twitter. Meme stocks can see rapid price spikes and declines based on frenzied trading.
While we are avoiding these "hot" trends, here's what we are doing — sticking to our long-term disciplined philosophy of building diversified, low-cost portfolios tailored to our clients' individual needs! In the long run, that's the most effective strategy to meet their goals. And to not lose sleep over the latest investing fads!
David Rappaport, CFP®