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Umair Bilal doubled his money in just six months. After thrashing the returns of the market last year, the documentary filmmaker and university film instructor believes he’ll be financially independent at an early age thanks to a brilliant visionary.

Mr. Bilal bet most of his net worth on five Ark Investment Management LLC exchange-traded funds he bought last June, created by Ark chief executive and chief investment officer Catherine Wood and her team. The results speak for themselves: Ark’s five actively managed funds have more than doubled and some are up more than 200 per cent year over year.

For instance, Ark’s Next Generation Internet ETF (ARKW-A) has gained about 170 per cent over the past year, while the Ark Fintech Innovation ETF (ARKF-A) is up about 135 per cent. The Ark Genomic Revolution ETF (ARKG-A) has surged more than 200 per cent, the Ark Innovation ETF (ARKK-A) is up about 170 per cent and the Ark Autonomous Technology & Robotics ETF (ARKQ-A) gained about 135 per cent. (All data from Morningstar as of Feb. 11).

Ark is set to launch its sixth actively managed ETF, the Ark Space Exploration ETF (ARKX), one of the year’s most anticipated funds.

Still, each of these funds is wed to rising risk. For example, the bulk of the businesses in Ark funds are high-tech companies with promising stories but that have yet to make money. An example is Ark’s flagship Innovation ETF, where eight of the top 10 holdings didn’t earn a profit in the first three quarters of 2020. To put that in perspective, if you held all 10 companies privately, you might need a corporate business loan just to feed your cat.

Mr. Bilal, however, believes they’ll make big profits soon. “I expect to earn at least 20 per cent a year [with Ark funds] over the next 20 years,” he says.

Other investors are a little less certain. Deepu Alex Thomas began buying Ark’s actively managed ETFs in 2019. “Once I doubled my money, I sold half of my holdings,” Dr. Thomas says. “By continuing to hold the remaining shares, I have continued exposure to the growth story and the hype of ARK funds with no risk of loss now.”

But Ark’s popularity presents another risk. Once an active manager gets identified as someone with a working crystal ball, an avalanche of new investors flood into their funds. The funds then become tougher to manage as copycat investors start buying the same stocks, pushing up the share prices. This creates a quandary for an active fund manager. After all, when fresh money continues to flow into the fund, the manager can get stuck figuring out what to do with all the cash. Do they keep buying the same stocks, even though they might be priced too high? Do they sit on the cash and wait? Or do they shift investment styles to add different stocks?

Wild success can become a curse. That’s one reason why, according to the SPIVA Scorecard (which compares how active fund managers perform relative to their benchmark indexes), most actively managed funds that perform well during one time period often disappoint the next. The risk compounds for the Ark products because, as noted earlier, most of its businesses have yet to earn profits.

There’s always a chance that Ark funds will keep rising, but if you’re buying them with an aim to retire early, odds are high that this goal will backfire. Investing is a long-term game, much like a marathon. When training for and competing in a marathon, smart runners consider evidence-based plans. What provides the best odds of success, with respect to training and nutrition? During the event, how should they pace themselves? Successful runners obsess over the dull details.

When the starting gun fires, it’s best not to chase a fellow runner who’s sprinting. During my early years of competitive running, I ignored the young whippets who raced ahead. Instead, I followed the fast and steady older runners. Halfway through the race, we usually passed the whippets, looking bruised and ego-whipped. Nobody earns a prize for getting to the five-kilometre flag first in a 42-km marathon.

Jumping on the tail of a hot ETF will, most likely, offer a similar experience. That’s why young investors (and old ones for that matter) should think like cagey veterans. They should understand that our investment durations represent our lifetimes. In other words, a 30-year old investor might have money in the markets for more than 60 years. While working, they’ll be adding money to their investments. After they retire, they’ll withdraw a sustainable annual sum so they don’t outlive their money.

Whether you’re greedy or pragmatic, prioritize evidence-based methods over speculative performance chasing. Over your lifetime, the long-term odds don’t favour chasing hot funds. They don’t favour market timing. Instead, they favour globally diversified low-cost funds.

You could build such a portfolio with individual ETFs or with an all-in-one portfolio ETF. Investors with advisers should insist on the same, or ensure the adviser builds diversified portfolios with Dimensional (DFA) index funds. These low-cost indexes are only available to financial advisers who have received specific additional training by Dimensional to avoid speculation.

A strategy like this will help you cross the retirement finish line. You’ll also dust most whippets playing a much more dangerous game.

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