Chasing trendy assets can leave you vulnerable to concentration risk

By Fergus Halliday

November 19 2021
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Trading what’s trending might not be the best play right now.

While apps like Robin Hood and Superhero have made retail investing easier than ever, those looking to jump on the bandwagon of big-time stocks may want to think before they act.

Speaking to nestegg, Talaria Capital co-CIO Chad Padowitz said that the decades-long growth of stock markets and the rise of influencers had led many Australians to invest in US tech stocks and passive ETFs.

“For years, this has been a winning approach as share prices have soared,” he said.

However, Mr Padowitz warned that many of these hyped assets are arguably overvalued. While uncertainty remains high, he warned that investors who are overexposed to trendy assets could quickly find themselves in a bind.

“The largest danger of following widespread trends like US tech and passive ETFs is that many investors end up trading and owning the same popular assets.”

Pointing to the 2007 Quant Quake, Mr Padowitz warned investors to stay wary of concentration risk.

“This not only inflates asset valuations; it means if a market downturn occurs, more investors could suddenly find themselves caught in a congested race for the exit,” he explained.

According to him, overexposure is a double-edged sword.

While relying on trending assets to grow your portfolio may seem like a winning strategy in the short term, Mr Padowitz warned that markets are not linear. Market corrections are eventually going to happen, and they’re usually a surprise when they do.

“Too many Australian investors are preoccupied with guessing what will happen in the market, while not enough are building resilient portfolios to withstand volatile periods,” he said.

Rather than ask whether it will rain today, investors should be thinking about whether they have an umbrella ready if it does.

“Buying and holding trending assets isn’t a danger on its own, but it’s critical that these assets are balanced within a wider portfolio that offsets risk and is built to withstand volatility,” Mr Padowitz suggested.

His recommendation? Australians need to learn to look beyond trends and embrace more rigid investment principles if they want to build a line of defence around their portfolio.

One such principle is learning to properly diversify your holdings.

“Diversification enables investors to hold true to their convictions and generate consistent returns while spreading risk across markets, sectors and asset classes,” Mr Padowitz said.

While avoiding trending assets outright isn’t recommended, he advocated for investors to undertake “fundamental bottom-up research” into companies before adding them to their portfolios.

He emphasised the importance of broadening your investment scope to include consistent income in addition to share price growth.

“By focusing on these principles, investors can build a portfolio that helps protect and reward them through any storm,” Mr Padowitz said.

About the author

Fergus Halliday

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus Halliday

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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