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I’VE LATELY FACED one of the investment world’s greatest dangers: It’s called FOMO, or fear of missing out. If you pay attention to the financial news, you may be wrestling with this one, too.
Let’s start with bitcoin. I’ve studied it, but never invested. I’ve got friends who own the digital currency. I’m thrilled they’ve been wildly successful. But you know how awkward you feel when somebody tells an inside joke that you don’t get? Similarly, it’s a lonely feeling when those around you are enjoying a phenomenal rise in wealth—and you’re missing out.
I pulled up a chart as I type this. It shows that in the last 52 weeks bitcoin has surged from less than $10,000 to almost $45,000, an increase of some 350%. Or take a look at Tesla. I heard Elon Musk talk a few years ago and knew he was capable of great things. But I never saw the potential in Tesla. The company wasn’t making any money back then. Tesla is up 420% in the last 12 months.
How should we deal with FOMO? Having lived through many market cycles, I have six suggestions.
First, we need to be comfortable with who we are and what our goals are. I love entrepreneurs and the risks they take. But I have a confession: I never wanted to work 80 hours a week, like many entrepreneurs do. I love having a good work-life balance. And I don’t like concentrating my assets in one or two stocks, because I like to sleep at night.
I’m thankful that the world has risk-takers like Elon Musk. When I heard him talk, he was leveraged to the point where he didn’t have any more borrowing capacity. To be less than “all in” might lead him to lose focus, Musk said. I love that he’s like that. But I’m not wired that way.
Second, obsessing over someone else’s wealth takes the joy out of our own success. My 401(k) earned 17% last year. I’m thrilled. But if I focus on what I could’ve done in Tesla, I’d lose the joy of a fantastic investment year in the middle of a pandemic.
Third, we all have a circle of competence that gives us an edge over others. When we figure out what our edge is, we should take advantage of it, rather than try to imitate someone else.
For example, our human capital—our income-earning ability—is often our most valuable asset. There’s usually no greater return on investment than adding to our skillset and making ourselves more valuable to others.
In investing, it’s the same principle. I know banking. I have invested in bank stocks in the past. I’ve done well because I can make a decent estimate of when those stocks are undervalued. Technology stocks? It’s a different story.
Fourth, we need to temper our confidence by studying the history of bubbles. A number of them have popped during my investing lifetime. When I was working toward my MBA in the 1980s, I studied Japanese business methods because, at the time, the Japanese were crushing it. Then they hit a wall and their stock market collapsed. The Nikkei reached an all-time high in 1989 of 38,916. Today, it trades at 29,563. More than three decades later, it’s still 24% below its 1989 peak. That’s what a bubble popping can sound like.
More recently, the U.S. real estate bubble popped in 2006, and that wasn’t foreseen even by the elite economists at the Federal Reserve. But we also make the reverse mistake: I thought Amazon was a bubble in 2013. It was trading at nosebleed levels, and it wasn’t making any money or predicted to make a profit anytime soon. Today, it’s more than 1,000% higher.
Fifth, are you a conservative, diversified investor like me, but you secretly want to roll the dice every so often? I suggest taking some modest positions to scratch that itch.
My bitcoin friends are convinced the rally is just starting. As I see our currency being debased by so much government deficit spending, the outrageous predictions of bitcoin going to $500,000 strike me as plausible. Assuming I decide to get in, the next question is, how much?
Even when I feel I have Warren Buffett-like insight on some speculative investment, my rule of thumb is to allocate no more than 2% of my net worth. Allocating a small percentage is a reasonable way to get into the game without jeopardizing long-term goals. But it’ll never make you as rich as Elon Musk.
My final suggestion: Do you believe, like me, in owning a diversified portfolio of low-cost index funds? Take comfort that you likely already own a sliver of Tesla and other highfliers. After all, that’s how I earned 17% on my retirement funds last year.
Joe Kesler is the author of Smart Money with Purpose and the founder of a website with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers. Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe’s previous articles.
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I can’t argue with the math Dave. However, some people like to play a little poker once in awhile just to get together with the guys and risk a little money while having fun. I think my comment is for investors like me who know we don’t have a competitive edge and don’t want to risk blowing our financial goals, but who still enjoy a $5 bet on the Super Bowl just for the fun of it. As always, your comments are thoughtful and I appreciate them!
Valid.
I think it goes back to the maxim ‘know thyself’. A lot of people get caught up in speculation. Others just want a little fun on the side.
I put $1000 into ARKK a couple months ago, it’s up 50%. This is not measurable in our retirement/legacy calculations, and is unlikely to ever be relevant. However, it scratches that itch, and just might pay for a really nice vacation down the road. I’m not tempted to go buy a whole bunch more. If instead all the cash flowing into ark funds causes it to capsize, well, I haven’t lost much, and at least I’ll get a decent pun out of it.
I wish I could talk people out of the current index fund craze, “After all, that’s how I earned 17% on my retirement funds last year.” I made twice that (38,25%) with my active funds. The cure for FOMO is to avoid trading.
The folks in index funds are earning the market averages, which is a fine result. Instead, if you’re going to talk people out of anything, you need to talk them out of owning actively managed funds that lag behind the market. The only problem is, you’ll need to figure out which funds will trail the averages in the years ahead. Hint: Past performance is no guarantee of future results.
I just looked up the annualized return of the S&P index since 1992 — it’s 5.73%. I guess that’s fine, but some results are finer than others. My annualized return since 1992 has been 12.63% (the PRR calculated by TR Price for my active funds). Just lucky? I have never tried to guess which funds will do best — that would be a trader’s perspective.
“I know banking. I have invested in bank stocks in the past. I’ve done well because I can make a decent estimate of when those stocks are undervalued.”
Is there any evidence that experts in an industry are able to earn returns that beat the S&P over the long-run?
Good question parkslope. You may have a good point in general. However, in the little niche I claim to have some competence in I have found some modest success. I have focused on what I see as undervalued stocks that don’t have a lot of institutional followers. The more efficient the markets, the tougher it is to get an edge. That’s probably where we would have some common ground.
But I think it’s not unreasonable to think that some investors possess a circle of competence that can gain an edge in some markets. Especially the ones that are not widely followed by analysts. Whether my success was random, or from some insight I have from my experience, we could probably arm wrestle over. But I’m comfortable with my statement. Thanks for the comment.
Another great article, thanks Joe. 🙂
A good baseball player never decides what he’s going to after the ball is hit to him. He studies the game and his position in it, then decides beforehand what he’s going to do.
In risk of beating a dead horse, a good investor will decide on the proper asset allocation of low cost index or similarly well diversified funds for his position (risk tolerance, time horizon, etc.), then correct that allocation when it skews outside a given range, such as 5% or so.
FOMO will change to FOMU (messing up) IMO. 🙂
Thanks Langston. That is a winning formula to follow. Love the FOMO to FOMU.
Really enjoyable article Joe. I still get urges when a friend tells me they bought Tesla at $40, or some other big win. But more ofter than not any stock I buy goes south quickly thereafter. So its low cost index funds for me. I have a 2021 goal to understand Bitcoin. As part of my AARP TaxAide training I did some study of how the IRS treats it. It’s treated differently if its used as a currency (say to pay employees) or an investment. I can’t figure out we could use a highly volatile asset as an everyday currency. If my favorite CabSav Zaire by $20 per day per bottle, it would ruin my enjoyment!
Let me know when you figure out Bitcoin Rick! Thanks.
I really wanted to buy stock after the 1987 crash, but I was poor; every penny was going to tuition. I really wanted to buy Apple stock at 8$… but I was still unsure of myself and investing in index funds made sense. I really wanted to buy a batch of bitcoin at $1… but the household budget was in the red. I wanted to buy Tesla, Facebook… you get the picture. It seems a lot of popular speculative picks have also had surprising staying power. I figure I’ve had 7 good hunches, 2 that were ok, 1 that crashed and burned.
Now that a lot of plans have come to fruition, I can scratch that itch. If I’m interested in something, I can drop a small stake on it and just let it ride. If it goes up 10,000% maybe I can ‘retire’ right away. If it goes up 400% i can enjoy the ride and a nice vacation. If it crashes and burns, it makes no practical difference to me. I’ve purchased a tiny slice of ARKK. It’s up 50% since I bought it. Cool, but I’m not buying any more. Itch scratched.
Sounds like you have found a good balance in your investing philosophy. I appreciate knowing there are kindred spirits out there!
4 years ago my friend’s wife passed away from an illness – she was barely 50. Last year he fell ill and died. Luckily his kids are old enough to take care of themselves.
When i start thinking about what I shoulda, coulda, woulda done about BItcoin or Tesla, I quickly remind myself I have enough and the point is to enjoy the remaining time I am alotted.
Johny I’m sorry for the losses you’ve had. I think as we consider our mortality the limits of money come into focus as you’ve shared. Thanks for the comment..
Hi Joe, nice article. What do you think about ‘market timing’? Some people are outside the market because we are in a ‘bubble territory’. On the other hand, Peter Lynch -for example- don’t suggest trying to time the economy, and that if there are good opportunities at reasonable prices it could be wise to be invested in these companies (even if the market is pricey). But … there are ever some gurues holding a ton of cash, and anticipating a crash. What do you think?
Good questions Juan. The market timers have a knack of sounding smart by quoting all kinds of statistics that show the market is in bubble territory. The problem is that if you go back over the last ten to twelve years you can find cogent arguments every year as to why we are in a bubble and, if you followed them, you’d have missed the incredible run up we’ve enjoyed if we stayed the course. Someday of course they will be right which is why I recommend you have enough cash out of the market to be able to feel comfortable when a big downturn comes.
To me, the psychological cost of of riding through a downturn is the price we pay to enjoy being in the market when it goes on a run like we are enjoying now. Monitor asset allocation and rebalance out of equities when they go beyond my comfort percentage periodically is my practice.
As to stock picking, I know I’m no Peter Lynch, so I stick to low cost index funds for the most part.
Thanks very much for the answer. I completely agree. Regards!
Joe, I had a great read, this was right up my ally. People with a plan are in no rush to get to there goal, they will get there it just might take a bit longer
People with no plans always hunting for the quickest way to get to the end, one small mistake and they need to start over again.
My lesson
We had just bought a cabin, it was suppose to just need to replace some flooring and paint a bedroom. Suddenly we guttered the hole place…. I was standing there thinking how h——- am I gone put this back together.
Our 4 year old son come up and saw I was looking a-bit concerned ( I was terrified )
He said Don’t worry dad, slow and steady get the job done….
That sticking with me
Great insights. Especially #2 above. I’ll just stick with “enuf” when someone asks.