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.