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FEAR OF MISSING OUT, or FOMO, seems to be everywhere. We suffer it when we read about our friends’ fabulous experiences on social media. We can also suffer it when investing, as we fret that our friends are making more on their investments than we are.
My own concern in recent months, however, hasn’t been FOMO, but FOLB. No, it doesn’t roll off the tongue like FOMO. It’s my own invention—and it stands for fear of losing big, a particular worry of mine.
The U.S. stock market is near record highs. With my regular rebalancing, my stock allocation sits at 60%. When I look at the dollar value of that 60%, and think about the possibility of losing 30% to 40% of it in a bear market, I hear alarm bells.
When I focused on the percentage I had in stocks, I thought I could weather a bear market. But I’d lost sight of the total dollars at risk. Losing 30% to 40% of that money doesn’t feel nearly as manageable. That’s why I’ve let my stock allocation trend down from 64% a year ago.
I’ve lived through several bear markets. I’d learned to look at them as buying opportunities. I also have sufficient cash reserves to go several years without having to sell a stock or stock fund.
Theory says that as long as I don’t sell after a big drop, the possible paper loss is irrelevant. I can add to my positions while the market is down, and the next bull market will make me whole again and then some. These thoughts should be comforting. But the sheer magnitude of the potential dollar loss is disquieting.
The other concern I have: There are few good alternatives to owning stocks. Cash earns next to nothing. Bonds have the potential to lose value if interest rates rise. And if inflation persists, cash and bonds could have negative real returns. On top of all that, selling my stock holdings would lead to taxable gains, which is another reason to stay invested in this record-high market.
I have a difficult choice. I can either sell more stocks and accept the low returns that come with holding cash or bonds. This may lead to FOMO if stocks continue to climb. Or I can stick with a higher stock allocation and suffer bouts of FOLB.
I have no plans to make a radical shift, but I expect to continue selling stocks if the market keeps rising. I’ll hold more cash than I otherwise might, waiting for the next buying opportunity. Whenever it arrives.
I try to imagine how I would react to a “70/10 event”* in which my stock portfolio lost 70% of its value and did not return to its previous high for 10 years. What would I do? How would I feel, not only about the significant paper loss, but also the length of time it would take to become whole again?
[*Historical context note: The Great Depression was an “88/25 event.”]
FOLB is a very real concern for someone in their 80s and not knowing how many more years I’ll have to recover from a deep drop in stocks.
To each his/her own, but with 2+ years of living expenses socked away in cash, the ability to weight one’s equities at a higher percentage, IMO, is still in play. Historically, most bear markets have run their course (from peak to trough) in around 18-24 months, so those cash reserves are critical to making this approach work.
Even as I near retirement (6-8 years from now), it’s helpful for me to remember that market volatility should not be confused with market loss. Volatility is the price I must be willing to pay for market gains that will (hopefully) help offset the perils of inflation eroding our future purchasing power.
God willing (and health permitting), my wife and I have another 30 years in our investment time horizon after my work years end. What is left over once we exit is generational legacy wealth for our offspring (and eventually, our grandchildren). As such, I have no plans to load up our retirement portfolio with bond holdings, even on the eve of retirement.
Interesting. NOT being close to 100% equities generates FOLB, for me. With inflation rearing it’s ugly head, interest rates only headed higher, and an economy being artificially repressed by a pandemic, going to bonds as a long-term strategy seems… silly, to put it politely.
I am still buying stocks, but I’m being very selective. There are still a few companies that are a good value, but they’re very hard to find. I’d love to be able to own Coca-Cola or Caterpillar, but for those stocks the train has left the station.