Thursday, June 22, 2017

Experienced Investors and Novices

It’s common to hear that certain types of risky investments are not for novices. Some will take this to mean that such investments are good for experienced investors. This isn’t necessarily the case.

A recent example of this type of advice is an article warning investors about quadruple-leveraged ETFs:
“Investing in even modestly levered funds is a potentially dangerous proposition for inexperienced investors.”
This quote is true, but some readers may conclude that these leveraged ETFs are safe if you’re an experienced investor. It’s worth reminding ourselves of a simple truth: if two investors buy the same investment for the same price on the same day, and they sell it for the same price on the same later day, they will get the same return. The more experienced investor won’t somehow get a better result. To perform better than novices, experienced investors must do something different from novices.

Quadruple-leveraged ETFs are usually a bad idea for investors no matter their experience level. No doubt there are ways to handle them that are less damaging than other ways, but don’t let overconfidence drive you to poor choices. Saying they’re not for novices is almost a form of advertising to draw in investors wanting to think they’re sophisticated enough to handle them.

Most of us would likely see through a pitch like “Leveraged ETFs aren’t for novices, but a smart person like you could make a killing.” But subtler forms of the same pitch for different types of risky investments do work on some of us who seek the status of investing in sophisticated products.


  1. Quadruple-leveraged ETFs are usually a bad idea for investors no matter their experience level

    Second that!

    1. @Bram de Haas: I thought that might resonate with some readers. I would be interested in hearing from experienced investors who (1) plan to use leveraged ETFs themselves, (2) understand the extreme volatility losses of both leveraged and inverse leveraged ETFs, and (3) who can explain how using leveraged ETFs is beneficial to them.

  2. Interesting post. I never really considered that those warning-type descriptions might have the opposite effect.

    1. @Anonymous: I think TV figured this out a long time ago: "WARNING -- this shows contains violence and sexy stuff."