ETF Demand and Our Emotions

In a recent article in the Wall Street Journal, columnist Jason Zweig wrote, “More than 1,900 exchange-traded funds offer almost every investing strategy you could think of — and many that might occur to you only if you were drunk. Maybe the manic innovation needs to stop, and the fund industry should go back to basics.”

While I agree, I don’t believe they will anytime soon. Investors are driven by all kinds of biases that aren’t unlike the things we deal with regarding our health. I know many people who smoke. They know it’s not good for them, but they find it impossible to quit. (Many of the reasons are emotional. The connect it with a break from work, it is a form of rebellion left over from youth. They got social acceptance when they took it up. They had people they respected or admired who smoked (stars, celebrities).

Food is the same way. There are probably things that I eat that are more out of upbringing and childhood connections than anything. They may or may not necessarily be bad. We also chose foods based on conventions. Why don’t we eat pizza for breakfast, or a sandwich? Well maybe some do… “It’s because you don’t do that.” There are certain foods that we call “comfort” foods. Why? It’s emotional. Some investments might be called “comfort” investments, since we like owning them. Why? Maybe because my dad invested in it, worked for the company. My mom used to listen to talk radio on investing. She owned a certain well-known fund company’s funds for a long time. They have great marketing that really leads you to believe that they are all about taking care of you and they are fantastic. I had a hard time selling those even though I knew the funds I use now were far better diversified and are better managed. I knew the other fund company lazily weighted the funds based on company size in the name of low cost, but it still made the decision hard.
My point is that we are so driven by emotions and we often don’t even recognize it. Fund companies know this and will keep coming out with products to meet the demands created by these emotions. Where there is demand, supply will show up.
Coaching is the answer. I often find myself dipping into psychology to help investors stay on the right track. I often refer back to my days in college where I was making a decision between psychology or economics as a major. I had enough coursework to go either way. Now I’m glad I chose economics, but all that psychology background sure has come in handy.