Don’t Let FOMO Drive Investment DecisionsSubmitted by Castlebar Asset Management on September 5th, 2017
Depending on your outlook, you may be concerned about recent news and current events and how they could impact your investments. There’s a lot of uncertainty out there right now -- both in regards to financial markets and to things like politics, disruptive technology, and more.
Not acting could leave you behind -- right?
It’s tempting to leap into hot stocks with companies that seem destined to make history, or to try and get ahead of the curve on even bigger trends like cryptocurrencies or other asset classes that are soaring right now.
But none of this means you should make a change to your portfolio right now -- especially if you’re feeling some FOMO, or fear of missing out on something your friends, your coworkers, or others in your network jumped on while they had the chance.
Why Average Investors Don’t Beat the Market
It’s natural to feel concerned about what the stock market is doing, especially in uncertain times or when there’s a lot of activity going on. In fact, it’s okay to feel that way!
Where most investors get into trouble is when they act on those feelings and deviate from their original investment strategy -- which was probably based on rational, reasonable thinking rather than emotional decision-making.
A report from DALBAR shows that average investors consistently fail to beat the market. Had these investors simply put their money in something like the S&P 500 and not touched it, they would have enjoyed higher returns than what they ended up with.
Why does this happen? See above: average investors get into trouble when they make emotional, irrational investment decisions. And there’s nothing like fear of missing out or losing a great opportunity to make investors do silly things with the money they have in the market.
How FOMO Can Lead to to Bad Investment Decisions
When you experience FOMO -- or any other emotional reaction that leaves you feeling uneasy, nervous, or worried -- you’re more likely to sway from a set strategy. That can set you up to make some bad investment decisions.
Warren Buffett’s been telling us this all along. He reminds us to be “fearful when others are greedy and greedy when others are fearful.” But what happens when we’re the ones who feel the fear (of missing out, or getting burned, and so on)?
Investors suffering from FOMO or other fears tend to buy high and/or sell low. One of the biggest mistakes you can make when suffering from FOMO is hemming and hawing on an investment decision, and then going for it -- right as the market for that asset peaks.
This happens the other way, too, when investors panic and start selling their holdings as the market drops. If you do both, you end up buying an asset at or near its peak and getting rid of it at its lowest value, leaving you with a big loss.
It’s exactly what Buffett’s famous mantra cautions against doing. But average investors just can’t seem to help themselves.
Sound familiar? It’s time to hit the brakes and stop tinkering with your investment portfolio. It’s tempting to try and make all the right moves to avoid missing out on a big opportunity, but the most successful investors are those that guard against making a mistake -- even at the cost of potentially stumbling upon a great opportunity they may have otherwise missed.
Or, successful investors actually follow Buffett’s advice. They understand that when the market starts dropping, that’s the real opportunity. If you can stomach the volatility, buying at this time gives you the chance to snatch up low-priced assets.
Don’t Let Fears (of Missing Out or of Anything Else) Lead You to Emotional Money Moves
Here’s the bottom line: do what you can to avoid letting irrational behavior sway your investment decisions.
That can be hard to do if you’re trying to go it alone. It gets easier when you have a trusted advisor you can call up and talk to the next time your coworkers are talking about the next hottest stock you just have to throw some money into before it leaves you behind.
An objective third party, like a fee-only planner acting as your fiduciary, can talk through the realities of the situation and evaluate your options. This way, you can quit worrying about the opportunity you may or may not miss out on and just focus on what’s really important: your strategic, thoughtful financial plan designed to help you grow wealth and achieve your goals.
Andrew Comstock, CFA
Please contact me at 913-660-0708 or by email to discuss your financial planning and investment management needs. You can sign up for our monthly newsletter here. Follow me on Twitter @CastlebarAM.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.