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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