The biggest success story to come out of 2020 was the dizzying rise of Cathie Wood’s ARK Invest, but 2021 was a far different story, details an article in Barron’s.

ARK’s flagship fund ARK Innovation peaked a year ago and is now down 52% from that high point. All of ARK Invests nine ETFs follow Wood’s investing philosophy of buying disruptive, innovative businesses, and the pandemic sped up the growth in many of these emerging technologies. But with rising inflation and Fed rate hikes on the horizon, the fund is now down 20% in 2022. While Wood’s approach could still yield great returns in the long run, Barron’s lists 4 lessons to be learned from ARK’s rise and fall that investors should take note of.

1. Beware of Outsized Gains. It’s unrealistic to expect any fund to post record-high gains year after year. In the 12-month period that ended in June 2019, about 30% of large-company stock funds outperformed the S&P 500. Only half of those companies did it again the following 12 months, and a mere 12% kept their winning streak for over 3 years. Indeed, funds that skyrocket in a short span of time are usually making extremely focused bets, so their downfall could be just as extreme. ARK’s Genomic Revolution fund is an example of this: after starting at the bottom, it soared to the 4^th percentile in 2017, fell to the 50^th in 2018, was back on top in 2020, and dropped down to the bottom again last year.

2. Don’t Chase Momentum. Investors tend to buy into a fund after it’s already made a lot of gains, and then they get out too late. Because significant cash flows into ARK Innovation didn’t kick in until late 2020, most shareholders missed out on the benefits from the huge gains earlier in the year. And, many likely sold their shares as the fund kept dropping over the last 6 months, making those losses even steeper. When investors chase the buzziest stocks at the wrong time, pouring money into top-rated funds, it generally means that a period of underperformance is on the horizon.

3. Beware Overlap. There’s another danger in chasing after winners: popular funds that seem unique oftentimes own similar stocks. Two-thirds of the holdings in ARK Innovation and ARK Next Generation Internet are the same, and ARK Space Exploration & Innovation and ARK Autonomous Technology & Robotics have half the same holdings. That makes for a much less diversified portfolio than investors might realize. While it’s common for ETFs to hold many of the same stocks, investors need to be aware just how much overlap there may be.

4. Honestly Assess Risk Tolerance. Funds like ARK’s that are highly focused and volatile aren’t for every investor, even those that believe in innovation and disruption. Having a manager whose skill they trust, and the fortitude—and financial flexibility—to withstand the market’s ups and downs is necessary. The key is to use these funds as a complement to diversified core holdings rather than allow them to take up the majority of a portfolio.

“The innovation companies are early in their business lines and a lot of them don’t have any earnings today, so their valuations are always very subjective,” says Ryan Jacob, manager of the $107 million Jacob Internet fund. “There will be periods when these stocks come in and out of favor, and last year was just a microcosm that saw both ends at extreme.”