The bloom is off the rose, so to speak. While several of Ark Invest's funds saw heroic gains coming out of the pandemic in 2020, the Cathie Wood-led outfit hasn't been able to repeat the feat since then. Indeed, several of the company's highest-profile funds are down by more than 50% from their early-2021 peak, dramatically underperforming the NASDAQ Composite during that time. In some cases, these funds are even trading below their launch prices, leaving any remaining owners deep in the red for an otherwise-bullish period for the market.

In other words, yikes.

Not to belabor the losses, but there are some lessons to be learned from these setbacks. Here are the three most important takeaways.

No diversification = no defense

If you're wondering, the Ark funds suffering the steepest sell-offs since February of last year are the ARK Next Generation Internet ETF (ARKW 1.60%), the ARK Innovation ETF (ARKK 1.09%), and the ARK Fintech Innovation ETF (ARKF 1.15%). These three funds are down 78%, 79%, and 77% from their respective peaks, versus a 33% decline for the NASDAQ Composite.

ARKK Chart

Data by YCharts.

And the names of these funds loosely point to one inherent challenge with Cathie Wood's (and her team's) stock-picking approach: It's hyper-focused.

See, these funds aren't just sector funds or even industry funds. They're each narrowly focused on one sliver of one industry within one sector. All stock groupings tend to move as a herd, and when that herd is built around one single business idea, you're going to see extreme moves. Sure, the approach paid off in a big way in 2020, but it has done far more damage since then.

To be fair, Wood never said or even implied one of her company's funds should be the entirety of anyone's portfolio; she would likely encourage all investors to maintain a diversified collection of holdings beyond ARK's funds. Notably, however, the majority of ARK's offerings are similarly narrow in their focus with no foundational holdings like market-based index funds in the mix.

Too much trading chips away at profits

While ARK's Chief Portfolio Manager Renato Leggi writes of one of the company's four key investing tenets -- "The market easily can be distracted by short-term price movements, losing focus on the long-term effect of disruptive technologies." -- ARK's fund managers haven't exactly sidestepped this trap. ARK Next Generation Internet ETF's turnover for the most recent fiscal year is a stunning 76%, meaning roughly three-fourths of ARKW's holdings weren't positions in the portfolio a year earlier. They replaced other holdings during that time.

There's an important footnote to add here. Although there's a whole lot of buying and selling going on, sometimes ARK's stock pickers are buying and selling the same stock over and over.

As an example, ARK Next Generation Internet ETF bought significant stakes in Tesla in the middle of this year, sold a huge stake in the company in August and September, and then repurchased a bunch of Tesla stock just within the past three months. The timing of those trades wasn't disastrous, although the latest round of buying is proving ill-advised. More to the point, these trades certainly seem meant to capitalize on the very short-term price movements ARK says are a distraction from remaining focused on the longer-term picture.

And it's not just ARK Next Generation Internet ETF. The ARK Fintech Innovation ETF's most recently reported portfolio turnover figure is 75%. The ARK Innovation ETF's is 55%. Given how these highly active funds are also ARK's worst-performing funds, it's not a stretch to suggest their frequent trading has done them more harm than good. It's yet another reason to just stick with a buy-and-hold strategy.

Recognize hype when you see it

Finally, the third reason Cathie Wood's stock-picking strategies aren't working so well this year is also the most philosophical of the three takeaways: These funds were seemingly founded on exciting cultural developments rather than reliable business opportunities.

That's not to say the internet doesn't exist or that consumers aren't looking for easier, tech-driven ways to handle their money matters. It's just that hope and hype can get the better of even the most seasoned of investing professionals.

We've certainly seen it before. Think back to the late 1990s and early 2000s, if you were around then. During these early days of the internet, nearly any new internet-oriented company seemed like a compelling prospect. As we look back in time, however, we can see how outfits like Webvan, PurchasePro,, and GeoCities were all doomed from the start. There were also too many search engines at the time and too many web browsers. Most of them are no longer around.

And this dynamic has implications today.

Although fintech is here to stay and many industries remain ripe for tech-driven disruption, like then, there are just too many companies jockeying to become players in markets that are nowhere near as big as they're being made out to be. Most of these companies are telling incredible stories too, stoking investor interest. When we look back a few years from now, though, we'll see many of these stories are mostly meant to raise funds, as there's no true understanding of the underlying market potential. Think GoPro and Groupon, two more contemporary disasters that even the pros loved in their infancy.

Just play it straight

None of this is to suggest ARK Next Generation Internet ETF, the ARK Innovation ETF, and the ARK Fintech Innovation ETF won't eventually recover. They can and may do so eventually.

Rather, this is all simply to illustrate how there's no replacement for a passive, diversified, long-term approach to stock-picking. The more active and aggressive the tactic is, the less likely it is to work out in the end.