The fear of missing out is a powerful emotion that can easily become a key consideration and deciding factor for investors. Comparing this to professionals in the business of managing money, FOMO is the last thing you will find in their playbook. Fundamentals, economic cycles, stock market cycles, events around the world, and a dose of prudence all drive the decisions of professional money managers.
When it comes to individual investors, rarely do they spend time understanding corporate earnings and economic trends that effect performance. For example, earnings in the United States are decelerating, and arguably, the first half of 2020 could see significant profit retraction and weak to neutral guidance.
Now with stocks having rallied more than 30% off their March lows, investors seem determined to continue pushing markets back to pre-COVID levels. But stocks were overpriced as the pandemic took hold, subsequently crushing earnings. From our perspective, we think investors are becoming overly bullish at a time when fundamentals simply don’t support this kind of behavior.
Frankly, we are confused at the reactions happening across all markets. How is it that people have become so convinced of their preference – bullish or bearish. We are in unchartered territory – a pandemic of extreme proportion and the economic recovery, post-COVID is anyone’s guess.
The pandemic has abated, but to consider it over seems premature. Nevertheless, this optimism is likely to lead investors into an already overvalued market, pushing prices higher and expanding Price to Earnings ratios. As this occurs, momentum strategies will trigger more buying. If fundamentals don’t support these prodigious moves to the upside, be prepared for increased volatility and inevitable selling.
Watching stocks soar to new highs while you sit on the sidelines can make you feel anxious, depressed and behind your peers. FOMO is extremely common and we see it all the time. This phenomenon of watching a stock make large moves to the upside while you are not invested further reinforces a missed opportunity. Ruminating the thoughts of negative outcomes is damaging to your psyche and your investment goals.
We talked about this early in the year, hindsight is 20/20. But no one can predict the future (accurately or consistently). Decisions are made in the moment using information we choose, even if bad information.
How does investing FOMO happen?
FOMO is nothing new, but we believe it has been intensified by relatively new part of society – social media. Think about it, watching your friends or acquaintances life via social media can influence your decisions and emotions. Of course, you are probably thinking, this will never happen to me. Well, denial is a not a good thing, either. But, that’s another show.
The interesting thing about FOMO is how quickly it happens and how easily it can be misunderstood. In fact, FOMO is closely connected to another emotion that we discussed several weeks ago – herding bias.
Even long-term investors can be victims of investing FOMO. Back in 2010, people were worried about putting their hard-earned money back into the market and many sat on the sidelines for long periods before easing back into the market. Today, many of those who waited have vowed to never again let this happen to them. Today, many are jumping in regardless of their surroundings to avoid that “missed out” feeling, once more.
Reduce Investing FOMO in your life
- Develop a financial plan based on short-term/long-term goals
- Be grateful for what you have today and what you are planning for tomorrow
- Realize social media presents only what it wants you to read. These specious claims can cause tremendous FOMO
- Realize investing influencers via online or friends mostly speak in generalities
- Stop reading about day trading – they won’t tell you about their losses
- Realize investing is a long-term proposition
- Avoid the “big win” mindset – it is not needed to reach financial independence
- Avoid unnecessary expense and increase your savings and income
Focus on the Long Term
The phrase Long-Term Investing is cliché, but the tenets of this philosophy should not be ignored. Indeed, building a solid plan and sticking to it is a sure bet if you want to avoid FOMO! Building wealth over a the long-term ignores day trading and the futile fight to pick the next “big one”. The proverbial “trying to pick a needle from a haystack” never goes out of style. Instead, we think it makes more sense to buy the haystack – another way of saying – diversify and stay invested.
FOMO and Speculating
Speculating is generally defined as “form a theory or conjecture about a subject without firm evidence.” or from a stock standpoint, “invest in stocks, property, or other ventures in the hope of gain but with the risk of loss.” When the crowd is going in one direction, let’s face it, your desire to research goes out the window. In an instant, you move from FOMO to speculator. Next, GAMBLING! We don’t mind when clients want to pick a few stocks. However, speculation should be done with no more money that one is willing to lose.
Is FOMO to blame for higher stock prices?
Our answer is, partially. Looking back, stock values have been decoupled with earnings and the economy for a few years. Now, in the midst of COVID-19, investors seem to ignore fundamentals. Maybe they have a legitimate point, too. The market has been good for more than 10 years and the thought of it ending is obnoxious. Just ask our government. Since the 2008 recession, our economy has benefited from low interest rates and inflation, extended benefits, and a very accommodative fed. In other words, solid fundamentals drive markets higher and, in their absence, the fed will save the day. This alone creates irrational behavior, add the pressure of those around you (friends, neighbors, family) and the ubiquitous FOMO takes hold.
For example, Bitcoin – went over $20,000 and “experts” asserted “it will continue climbing”. Many asserted this “new currency” was needed and useful. Today, it trades under $10,000. What drove it to $20,000? Well, it is safe to say that fundamentals had nothing to do with its precipitous climb. FOMO, however, could be the culprit.
How about Amazon, trading at 116 times earnings. This behemoth makes a lot of moolah, but investors are paying $116 dollars for $1 of earnings. WOW. And how about Tesla, they don’t have a P/E because they don’t make money. Yet, the stock trades above $800 per share. Fundamentals are not driving these prices – so what is?
The fear of missing out (FOMO) effects nearly every one on the planet. This phenomenon can invade your life and push you to make decisions that otherwise would not seem logical. Investing under the influence of FOMO can be disastrous, ultimately creating a reluctance to implement a prudent investment strategy that could help you grow and protect your wealth.
Know, a long-term investment strategy that is based on fundamentals, patience, rebalancing and other boring stuff won’t earn you bragging rights around the office. At least not in the short-term. Keep in mind, what you read on social media (Instagram, Facebook, YouTube, Twitter, etc…) is only what your acquaintances want you to read. They rarely, if ever, talk about their losers.
Work with an advisor to build a strategy designed around you and stick with it. The fact of the matter is, batting for the fences can score a win every now and then but, just like in baseball, it is hit and hope. Financial independence doesn’t require homeruns on every investment. In fact, an 8% average total stock market return over the course of 20-30 years will provide all the wealth necessary for your chosen lifestyle as long as you are saving the right amount over those years.