(Fear Of Missing Out)
Brian A. Magnan CFP®, AIF®
Director - Magnan Family Wealth Management
Last year the prices of the companies in the S&P 500 index rose greater than 20% and we are on pace for that again this year. We are undoubtedly in a bull market. One of the deadly sins that lingers in this market is Fear of Missing Out – FOMO. This emotion is dangerous because of its power to lead us astray from the plan. Succumbing to FOMO might cause an under allotment to savings, increased taxes, leveraging the home or portfolio, increased volatility in the portfolio, speculating in items that are overvalued or perhaps, have no value at all, just a hope that someone is willing to pay a higher price.
The Dangers of FOMO in Investing
Under Allotment to Savings: Warren Buffett has many great quotes. One of my favorites is “Only when the tide goes out, do you discover who’s been swimming naked.” As a planner, this means to me, “When the market prices decline, you can tell who doesn’t have enough in savings.”
Increased Taxes: If your assets are in a non-qualified retirement account, selling positions to make new trades can result in gains. Short-term capital gains are taxed as income, while long-term capital gains, though cheaper, are still taxable events.
Leveraging the Home or Portfolio: This is the “Under Allotment of Savings” to the extreme. Leveraging a portfolio can trigger a margin call during market declines, potentially forcing you to sell investments at low prices. Worse still, leveraging your home can lead to foreclosure if real estate prices drop, as seen during the 2008 financial crisis.
Increased Volatility in the Portfolio: FOMO trades often involve investing in assets that have already seen significant price increases. If an asset can rise quickly, it can also fall quickly.
Speculating: There are many forms of speculation, but all carry a high probability of loss. Speculation combined with FOMO may increases the risk of loss exponentially.
Defining Investment Value: We believe an investment should be valued based on its ability to generate revenue and earn profits. This enables the investment to pass along the profits as dividends to the shared owners. If revenue and profits were increasing nicely, others might be interested in purchasing a share of the investment as well, causing the value of the entity to be in demand and appreciate. On the other hand, if the investment has no revenue or profits, there will be no dividends. The investment will be subject to the whimsical attraction of the crowd to pay a higher price for any possibility of appreciation.
Ironically, giving in to FOMO may alleviate short-term anxiety but usually increases long-term stress. Since we are all humans, we are all going to experience FOMO. I am no exception. As with most emotions and investing, it is OK to feel it, but usually best to NOT ACT on it.
As you know, we follow a goals-based and planning-driven philosophy. Maintaining your plan during good times is just as crucial as during bad times. Our process of annual updates and quarterly discussions helps protect you from the deadly sins that prey on investors.
Happy Holidays to you and your loved ones. We truly appreciate the trust you have placed in us.