The Other FOMO

Hi everyone and belated welcome the second half of 2024!

I hope you are doing well and having an enjoyable summer. I’m sorry this quarter’s email is a bit late. This past July I sat for and passed the CFP® exam, and I’ve been waiting to get the final letter in the mail to make it official.

This has been a long journey. Almost 12 years to the day since I last took the CFP® exam, I passed. For reasons that are too long and personal for this email, I didn’t pass the exam this first time. While I’ve always used what I learned to help you, I could not call myself a CERTIFIED FINANCIAL PLANNER® professional. Now I can.

Whether it’s the CIMA® or CEPA® or CFP® designation, these designations are a representation of my commitment to you and your goals. My wife Dani can attest to the days, nights, and weekends I stay up reading, researching, and reviewing investments and financial concepts for my clients. I’m grateful that you entrust your finances to me, and I sincerely do my best to help you reach your goals.

Now on to FOMO…

The Part of Being a Financial Advisor I Did Not Expect
“Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors.” — Morgan Housel

Years ago, when I first got into Wealth Management and being a Financial Advisor, I genuinely believed that my job would focus on the numbers. (And it does. But it’s not the primary part of my day.) As much as I tried to build a practice around the numbers, time and time again the numbers were the second or third thing clients wanted to talk about. Feelings are almost always the primary focus. Whether a client realizes it or not, almost every client -- to the person-- leads with feelings.

The pieces finally came together some years ago in a conversation with a buddy. He asked me what the hardest part of my job was, and without hesitation, I said, “people’s emotions.” I knew right away. It’s not the math. It’s not markets or the economy. It’s people’s emotions. It doesn’t matter if a client is optimistic, pessimistic, a realist, a skeptic, or anything else. The primary decision driver are emotions – conscious or subconscious.

Don’t get me wrong. I’ve learned to appreciate this complex part of being a Financial Advisor, but emotions aren’t as easy as math though. Math is clear. 2 + 2 = 4. Learning a client’s personality and motivation is much, much more complex than calculating any financial formula. (There’s no emotional calculator to help with emotions like a 10bii+ helps with math formulas.)

For fun, I’ve attached a document for you to read from PIMCO called Know Your Own Mind: What Drives Investment Decisions. Before you look it over, I want to point out two things. 1) This is not an exhaustive list of heuristics and biases. 2) This is not meant to be the WebMD of Behavioral Finance, and I’m not asking you to self-diagnosis and call me up with your diagnosis. In fact, you likely (we likely) have multiple of these heuristics and biases that affect us, but there is no prescription (or cure per se) to our emotional responses to money. The only treatment is being aware of how our emotions affect us and working as a team to stay focused on your goals and objectives. ***See attached Know Your Own Mind: What Drives Investment Decisions

According to behavioral finance how we respond to things are typically called a heuristic or bias. One of the most common heuristics is Prospect Theory (Loss Aversion). In the simplest terms, it states that investors FEEL losses more than gains, and depending on which study you are reading, the magnitude of differences between losses and gains is between 1.5 – 3 times more. I can say that it’s true. I often joke that no one ever calls me to tell me that we’re making too much money. BUT, let their investment sell off a few percentage points and… the conversations change. Feelings (read as most often fear) are front and center. ***See Prospect Theory: What It Is and How It Works, with Examples (investopedia.com)

For better or (and often) for worse, the powerful influence emotions have over our finances is something we can’t(?), don’t (?), won’t (?) control. These emotions are what create FOMO and… The Other FOMO.


FOMO and… The Other FOMO

The Original FOMO – Fear of missing out.

“No matter what you do or where you are, you’re going to be missing out on something.” – Alan Arkin

The Fear of Missing Out (FOMO) is a real thing. Whether its kids fearing that they are missing out on things their friends are doing or people fearing that they are missing out on TV shows or movies. You name it, and there’s likely a person feeling the pang of FOMO right now. I’m not saying it’s good or bad. Just pointing out it’s a thing. And, of course, this happens in investing.

One example of FOMO that’s I’ve heard from clients this year is NVIDIA -- a few years ago it was Tesla, and a few years before that Apple, and before that… and before that. There’s always something that one might feel like they are missing out on. Or the fear of missing out on selling out of investments when the market is at a top or the fear of missing the buying in at the bottom. (I hesitate to mention … Or the fear of an… election outcome?)

For some reason, we think we know something that the other BILLION investors don’t. Clients think they know the next best, hottest stock. Or they can call a market top or bottom. Or that if so-n-so wins the election (you name it) WILL happen. All these examples fall into a certain heuristic and bias, but I’ll lump them together into FOMO. We’re afraid of missing out on the right call. This FOMO is bad enough, but the Other FOMO is even worse.


The Other FOMO… Forgetting One’s Main Objective

“Bad things happen quickly. Good things happen over time.” — Drew Matus

In academic research (and in my experience), the single greatest impact on a client’s ability to achieve their long-term goals is whether they are committed to their Main Objective. (To be clear I know things change, but they probably don’t change as often or as fast and clients have The Other FOMO.) Yes fees, taxes, market performance, etc. are all important., but staying Focused On {your} Main Objective is the single greatest impact on portfolio results.

When we have extreme, traumatic, frustrating markets (like the past several years), it’s amazing how quickly people throw the baby out with the bath water and forget their Main Objective. SOME-times, things happen that are so significant that we need to change course, however, often these changes are not market related. They are life related. (think birth, marriage, illness, death, or job loss)

Clearly, we’ll make changes when we need to, but it’s probably not as correlated to the markets (or nightly news) as you think. We’ll be flexible with our goals and not brittle and inflexible. Building portfolios and giving them time to bend (but not break) is important much like building skyscraper with steel and concrete vs wood and stone. ***See Architecture - Iron, Steel, Structures | Britannica or Difference Between Steel and Iron in Architecture: Key Characteristics and Uses – Engineers and Architects of America (e-a-a.com)

As a part of your team, knowing your Main Objective is imperative. Either (or both of us) not know your Main Objective means we are driving a car with no destination. And, let’s just agree that no one wants to be the kid in the back asking “are we there yet” … If we don’t know or Forget (your) Main Objective, we’ll never get anywhere except nowhere which is somewhere we don’t want to be.

There are three causes of The Other FOMO:

• Ambiguous goals - if you don’t know where you’re headed neither do I.
  • Actual conversation I’ve had:
    • Me – “What’s your goal with your money? What are you wanting to do with it.”
    • Client – “Just grow it.”
    • Me – “For?”
    • Client – “Just grow it. I’ll know when it happens.”
  • Having some idea is better than no idea.
    • “It is better to be roughly right than precisely wrong.” -- John Maynard Keynes

• Hyper-expectations — if you think that beating a single stock or index is your objective, you better have nerves of steel.
  • Being singularly focused is not only hard on the analytical front but also hard emotionally, because it’s easy to stay committed to this philosophy when markets are going up. The hard part is being committed when the markets are going down. (I won’t list here all the emotional heuristics and biases about sell or not selling when you should.)
    • “Investments don’t make mistakes. Investors Do.” — Carl Richards

• Emotional Blindness - Not knowing/understanding/acknowledging how emotions impact your decisions.
  • Most people think that riskiest thing in their portfolio is their investments. It’s not. It’s their emotional response to their investments.
    • Numerical (Investment) risk I can measure and quantify. Emotional risk... I cannot.
    • “Risk is good. Not properly managing your risk is a dangerous leap," -- Evel Knievel

The New FOMO … Focusing On {YOUR} Main Objective

“There is virtually no way to achieve anything without a goal in mind. If there’s nothing defined, then it’s impossible to known if anything was achieved.” - Michael Hanson

Warren Buffet may be the most famous investor ever(?). He’s quoted, immolated, and benchmarked by many people. He’s famously quoted for saying, “Be Fearful when others are greedy. Be greedy when others are fearful.” Little do people realize that over 90% of his net worth came after his 65th birthday. (I know, I know he’s blessed with a long life.) However, what Warren Buffett does better anyone else is that he knows what his goals are, and he stays with them. He expertly knows that investing takes time, and constantly changing objectives (or the Other FOMO) constantly restarts the clock.

Creating your eMoney plan, updating your financials, and doing annual (if not more frequent) reviews are ways we stay Focused On {your} Main Objective. Another way is through portfolio creation and allocation. The portfolios that I create for you are known as strategic portfolios not tactical portfolios -- meaning they are focused for longer term objectives not trying to make near term (or tactical) changes based on current market condition. (I’m not saying that I don’t watch and react to current event, it’s just likely not as much as a client would emotionally expect.) ***See Strategic Asset Allocation Definition, Example (investopedia.com)

In my opinion, investing isn’t about today (or tomorrow for that matter). It really isn’t. Today money is what we have in our savings account. Investing is about Focusing On {your} Main Objective. Your Main Objective dictates your investment portfolio not the other way around. Once we know your Main Objective and the expected time it will take to achieve it, we then implement the investment strategy which will take time. (For perspective on the value of time on investments, I’ve attached a document from JPMorgan Asset Management that shows how the longer the time horizon the higher likelihood of positive outcomes.) ***See attached JPM -- Time, diversification and the volatility of returns

My main objective as your advisor is to help you achieve your Main Objective. I’ll continue to guide you with wealth planning and investing in risk adjust portfolios to get you to your goals. (Notice I didn’t say beat the markets.) Often clients and prospective clients think that a good Advisor beats the market. In my opinion, a good Advisor helps his/her clients Focused On {your} Main Objective.

Whether it’s a meme stock, an election, 24-7 news, for neighbor’s-friend’s-cousin’s-father’s-daughter’s physician who has never lost money investing and always does 20%/a, try your best not to get distracted and Forget Your Main Objective. Most of all, call me. I’m here any time (during business hours) to talk through things and adjust as needed.

• If you don’t know your main objective — call me.
• If you feel like you’re losing sight of your main objective — call me.
• If you want to check in on your main objective — call me.
• If you want to change your main objective – call me.

I’ll leave you with this quote from Carl Richards’ book The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money. (It’s worth a read.) “After every financial crisis we often ask, how did we miss the signs? In fact, a large-scale financial crisis can be hard to predict, let alone prevent. … By contrast, a personal financial crisis is almost inevitable unless you address the truly important tasks in your life before they become urgent.”