Don’t be Dana Scully

I love the X-Files. Love it. The mediocre acting, the campy monsters, shadowy figures. It’s great. But one of the best parts is that every episode is exactly the same.  Like this:

1. Mulder & Scully investigate mysterious phenomenon.
2. Mulder sees supernatural explanation.
3. Scully is blind to all supernatural explanations.
4. Supernatural thing/being/occurrence puts Scully in danger.
5. Mulder saves Scully from supernatural thing/being/occurrence.
6. Scully remains skeptical.

Again and again and again. Aliens. Mutants. Inbred murderous farmers. Deranged zoo animals. Ghosts. Scully isn’t having it, and as a result gets herself into trouble.

There are lots of investors out there acting like Dana Scully. They refuse to see the evidence of what is in front of them. They are unaware of their own blindness, unconvinced that their behavior this time will end up with results just like last time. The best example of this right now is people chasing currency-hedged international stocks in 2015.

Among fears of a surging US Dollar (therefore weakening international currencies), assets rushed into WisdomTree’s popular European Hedged Equity ETF (HEDJ). The fund took in $13.7 Billion in 2015, more than any other ETF. The #3 ETF by asset flows was a similar vehicle from Deutsche Bank, a hedged version of the MSCI EAFE benchmark. Combined these two products wrapped up over $25 Billion in investor dollars in the last calendar year.

So what has the dollar been up to so far in 2016? A quick plummet, mostly.

Okay, it’s a little early to be ringing bells here. But that’s a nasty drop since year end. And, more broadly, take a look at a 5-year chart. Ask yourself: when do you want to hedge your currency exposure?  Before a 5-year run, or after a 5 year run?

And when do you think people bought it? HEDJ was created in 2009. In 2010 it had about $15 million in flows – 1% of the 2015 flows. It only had another $15 million over the next two years. It wasn’t until 2014 when the US Dollar starting picking up steam that the fund did as well, gathering $5 Billion.

Of course there are a million examples of this. We are so blind of our behaviors, repeating the same mistakes over and over and over again. In 2015 two of the products with the most investor outflows were an Emerging Markets ETF and a gold ETF, perfectly following a few years of underperformance. It doesn’t matter if it is stocks or mutual funds or ETFs or star managers, we just can’t quit chasing performance. But you can – use an investment policy statement to guide your decision making and have some discipline. Quit repeating your mistakes. Don’t be Dana Scully.