Cathie Wood, the founder, CEO, and chief investment officer of ARK Invest, has made quite the name for herself on Wall Street. She's become known for her big bets on disruptive companies that are focused on innovation and ushering in tomorrow's newest technology. Wood's investment philosophies contrast sharply with those who favor a more conservative approach, but her success shows a true risk-reward trade-off.
ARK Invest's flagship exchange-traded fund (ETF), the ARK Innovation ETF (ARKK 1.05%), quickly became an investor favorite in the bull market that followed the crash at the beginning of the COVID-19 pandemic. From Mar. 2020 to Feb. 2021, the ARK Innovation ETF climbed over 300%. It averaged just over $9 million in assets under management in 2016, but at its peak in 2021, it reached just under $28 billion. Today, it sits around $7.9 billion.
The ARK Innovation ETF's roller-coaster ride since its Oct. 2014 inception has reaffirmed a timeless lesson for me: Reacting prematurely can often do more harm than good.
The ARK Innovation ETF mirrors the movements of growth stocks
The actively managed ARK Innovation ETF aims to hold between 35 and 55 stocks at any given time, all of which fit into the growth stock category. Here are its top 10 holdings as of Nov. 24, 2023:
- Coinbase: 10.15%
- Roku: 8.70%
- Tesla: 8.01%
- Zoom Video Communications: 6.84%
- UiPath: 6.58%
- Block: 5.88%
- CRISPR Therapeutics: 4.94%
- Roblox: 4.21%
- DraftKings: 3.94%
- Twilio: 3.94%
The stock market, in general, is volatile, but that volatility is often amplified for growth stocks because their share prices are heavily influenced by market sentiment and future growth expectations.
ETFs are supposed to cushion investors from the effects of an individual company's volatility because they spread their investments across many companies. However, with a specialized fund like the ARK Innovation ETF -- which focuses on high-growth industries -- that diversification doesn't always mitigate the pain of the market's swings because all of its individual holdings are subject to rapid fluctuations.
Keep your focus on the long-term goal
Being undisciplined in investing can be costly. I'm sure millions of investors (myself included) can attest to this firsthand. Regarding growth stocks, the biggest part of being disciplined is expecting (and embracing) the inevitable volatility and not letting it cause you to make a short-term move that goes against your long-term interest.
During periods when growth stocks are soaring, it's easy to want to pile money into the stock market to take advantage. However, this can cause you to abandon conventional investing wisdom, forego your due diligence, and put you at risk of losing money fast if the stock market reverses. Roughly a year after its Feb. 2021 peak, ARK Innovation ETF had lost half its value. It's currently down over 70% from that peak.
Data by YCharts.
On the flip side, being undisciplined could also cause you to prematurely sell shares during bear markets out of fear of losing money. Investing is a long game, especially when dealing with growth stocks that are relatively early in their development. Part of playing the long game is understanding that it doesn't matter if a stock is up today, down next week, up next month, down next year, or whatever -- as long as the long-term results are there.
Avoid trying to time the market
One of the best ways I've found to be effective at remaining disciplined with investing is using dollar-cost averaging. When you dollar-cost average, you put yourself on a schedule, choosing a set amount to invest at predetermined intervals -- weekly, biweekly, monthly, etc. -- and at those times, you buy shares no matter what the prices are.
Regardless of whether you believe stocks are overvalued or undervalued at any given time, you make your predetermined investment. Your investing frequency should be whatever works best for you and is most likely to help you stay consistent.
It's natural for investors to want to occasionally try to "time the market" by buying before stock prices rise or selling before stock prices drop, but any successes you might have at timing the market will be products of luck more than skill. You can make educated guesses about the directions stocks will move next using logic, but the problem is that the stock market isn't always rational, particularly not in the short term.
Using a dollar-cost averaging strategy can help you fight the urge to attempt to time the market, and keep your focus on remaining consistent through ever-changing market conditions. That's what usually matters over the long run.
