Financial Innovation or Investment Fad?

Innovation is a permanent and usually beneficial force in society. Advancements in medicine, technology, construction, and nutrition to name a few have all afforded humanity benefits that are well appreciated.

When it comes to creativity in the financial services sector, there have been occasions where it pays to be cautious or outright avoid a strategy or product. The challenge is in today’s world, how do you decide what new offering has merit for you, and which is not a fit for you?

Bulls, Bears, Pigs

There is an old saying on Wall Street, “Bulls and bears make money, but pigs get slaughtered”, meaning if you are too greedy, you will lose. In today’s parlance, Fear of Missing Out (FOMO) is another emotion derived from fear that can drive one to adopt that shiny new object out of fearful greed, instead of using research and reason. Don’t just invest in that new thing to make money, really understand it first.

Common Sense

Does this new product or strategy make common sense? Take for example the very new concept of the single-stock ETF (Exchange Traded Fund), which seems to be an oxymoron, given that the word “Fund” means by definition to be a grouping of investments. This new proposed product is complex, and some are being considered with a highly leveraged aspect to them. After all, why not just buy the stock? To be fair, one of the creators of these new, yet-to-be-approved products do warn they are for highly experienced traders only, and are designed to serve a very specific function in a portfolio, so clearly not for every investor.

Finance is a Business

Every investor would do well for themselves to remember that investing is a business for those that are providing services and products. In every business, especially as they get larger, there are creative people who cannot wait to make something brand new and see it brought to market. The creative forces can be strong in an organization and in the light of day, products and strategies that really don’t serve much of a purpose have been created. Also, one should remember that product fees and interest earned on cash balances also can drive product creation decisions.

Like every industry, there have been wonderful and beneficial innovations in the financial services space, and some that we all regret ever saw the light of day. One of the best ways to help understand which have lasting benefit to your situation is to engage the guidance of a licensed and vetted financial professional. Advisors can be engaged on an ongoing basis, or by the project, or even by the hour, so the ability to get advice on a cutting edge innovation is possible, now more than ever.

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