Old vs new investments

Editor's Note Dhirendra Kumar’s insights and timeless advice for investors --------------------------------------------------------------- 31-August-2024 --------------------------------------------------------------- Dear {NAME}, Every Saturday, I share my perspectives on a topic investors will find useful. This time let’s look at how young investors are drawn to the latest innovations in personal finance and investing. Old vs new investments A few days back, I read an X post that made the point that younger people are much more attuned to trying out new, innovative investment options than older people. Going by the likes and reposts, the post attained impressive approval amongst its audience. Nothing is surprising in this. Some (perhaps many, or even most people) people are attracted to the idea of anything new. In his book ‘Antifragile’, Nassim Nicholas Taleb has called this ‘neomania’. Over the last few hundred years, the world has seen many new and wonderful things. However, neomania sufferers assume that the reverse is also true. Not wanting change or trying something new is supposed to be a bad thing in these times, but I would say that as far as investing goes, people who are suspicious of new things are likely to do much better. The curious thing about the discussion was the actual division of old vs new investments. Predictably, fixed deposits, gold and real estate were classified as old. However, mutual funds, crypto, and P2P lending were lumped together as new. I’m sure this categorisation has raised many eyebrows amongst my readers – it certainly did mine. Who are these people who think that mutual funds belong to the same pigeonhole as P2P lending and crypto? This classification reveals a fundamental misunderstanding of investment vehicles and their histories. Mutual funds, which have been around for nearly a century, are far from new in the world of finance. They represent a well-established, regulated investment that has stood the test of time. To group them with relatively recent and highly volatile boondoggles like cryptocurrencies or the black box of P2P lending demonstrates a lack of historical perspective and financial literacy. This conflation of disparate investment types is particularly concerning as it may lead inexperienced investors to equate these vastly different options' risks and potential returns. These things become part of the narrative, and people accept them as having some validity just because someone is saying so. Moreover, this misclassification highlights a broader issue in how financial education and information are disseminated, especially through social media platforms. The oversimplification of complex financial concepts into catchy posts or tweets can lead to dangerous misconceptions. At this point, I think most serious people have given up on finding useful guidance on a complex issue on social media. The classification of mutual funds in this old vs. new debate is a matter of such complexity. Mutual funds are a universe unto themselves, and an old-vs-new dichotomy exists within that. I would classify diversified equity funds as' old' as most debt funds. These are types of funds that have been around for a long time and serve well-defined investor needs. Constructing a portfolio for any goal using such funds is possible. The ‘new’ types are the plethora of sectoral and thematic funds launched in huge numbers in the last few years. These have nothing to do with investor needs and are designed to serve the business needs of fund companies. Do note that I’m not saying old or new funds. Instead, I’m saying old or new fund types. Many new funds are the old type and quite suitable for investors. The important thing is that this allure of 'new' and 'innovative' investment options should not overshadow the importance of understanding basic investment principles, risk assessment, and the value of diversification. Many years ago, while reading a history of scientific research, I came across a most interesting idea. Great researchers are distinguished by a relentless drive to prove themselves wrong. This may initially sound counterintuitive, but bear with me for a moment. The way it works is that you have an idea, form a hypothesis, and then try – very hard and very seriously – to prove yourself wrong. If you can make this attempt with all honesty and humility, then you are a good researcher. If you think about it, you’ll realise this is just as true of investors. --------------------------------------------------------------- Thank you for being a Value Research Insider. I hope you found this note useful and interesting. What did you think of today’s note? 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