Stick to the Plan! Why FOMO Can Kill Your Investment Portfolio
From a Jeff Clark newsletter, where he talks about FOMO (Fear of Missing Out) and what risks it entails to investors.
Why FOMO could ruin you
By Jeff ClarkIn 1999, the various conservative mutual funds I recommended they invest in earned 58%. It was far more than we had projected. It was far more than they needed to maintain their standard of living.
But, the Munder NetNet Fund their neighbor invested in – which only bought internet-related stocks – earned three times that amount.
The couple told me they wanted to sell the funds I recommended and put everything into the Munder NetNet Fund.
I reminded them of their long-term goals. I told them that 1999 was an “outlier” year. Just about everything made money. They had made far more money in their conservative funds than we had projected. It wasn’t likely to happen again anytime soon.
And even though I would have profited handsomely on the commission earned by selling their existing funds and buying the Munder NetNet Fund, I told them not to do it. In fact, I refused to do it.
So, they fired me. They took their money to another broker who did exactly what they wanted to do.
Over the next three years, the conservative funds gained an average of 9% per year. The Munder NetNet Fund lost an average of 27% per year.
The couple’s money evaporated. Their financial security disappeared.
Had they simply stuck with the plan we had set up to make 10% per year over time, they would have been just fine. They never would’ve had to work again. They’d never have any financial concerns. They could’ve raised their family with all of the benefits that financial independence provides.
But that wasn’t good enough. Their neighbor had made more and that wasn’t acceptable. So, they threw away the strategy that worked best for them… and rolled the dice on a more aggressive posture.
That’s the danger of FOMO – Fear of Missing Out.
Whenever there’s a hot trade in the market, whenever an asset class captures the headlines for producing HUGE gains, the automatic response for most investors is, “Damn! I have to jump on board.”
To them, valuations don’t matter. Logic doesn’t matter. All of the time-tested market-based fundamentals don’t matter.
All that matters is… “This asset is moving higher. My friends and neighbors are making more money than me. So, I have to get on board.”
It’s a classic FOMO event.
Folks… I have to tell you… FOMO will destroy you.
If your neighbors are making money, then good for them. If Biff and Muffy at the holiday cocktail party are bragging about their HUGE profits in cryptocurrencies, then good for them. That’s wonderful. You should be glad that your friends, neighbors, and in-laws are doing well. Prosperity is a good thing.
But, when logic doesn’t support the trade – or when your own financial objectives require a more conservative stance – then chasing the trade is a mistake.
You should focus your investing and trading strategies on what is right for you. That means you’ll underperform your neighbors in some years.
But who cares? As long as you meet the performance necessary to achieve your long-term goals, then it’s a win.
I’m a trader. My immediate objectives are to make profits on short-term trades. But my recommendations fall within the constraints of a longer-term objective. And in the longer-term, it’s the contrarian – or less popular – trades that will generate the largest gains.
Logic and reason always win out over emotion.
Chasing performance… chasing the hot idea… is almost always a bad idea.
Traders who rush to get into trades simply because it’s the hot idea of the moment, or because their neighbors are profiting, are making a mistake. If the trade doesn’t have a fundamental backing… if it doesn’t fit with your overall longer-term strategy… then it’s not likely to turn out well.
The S&P 500 nearly rallied to a new all-time high earlier this week, but current valuations and current technical conditions don’t favor chasing the stock market higher right here.
So, I don’t mind telling folks that now is a good time to sit on the sidelines.
The FOMO is intense. I feel it every day when I read emails from my subscribers.
We don’t need to chase any trades just to keep pace with the neighbors. So, I’m telling my subscribers that the sidelines look like a pretty good place to hang out right now.
FOMO will argue otherwise. But I have more faith in the profitability of an anti-FOMO trade.
Traders should be cautious right now.