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AT THE 2016 SUMMER Olympics in Rio de Janeiro, South Africa’s Chad Le Clos challenged Michael Phelps for the gold medal in the 200-meter butterfly. A famous image emerged from that event: Throughout the semifinal, Le Clos repeatedly looked over at Phelps as he struggled to keep up. Meanwhile, Phelps just kept looking forward. The result: Phelps ultimately won the gold, while Le Clos trailed in fourth place.
I believe there’s a parallel between what we saw in that race and what we see in the investment world. Why do people pile into speculative investments like meme stocks, dogecoin, SPACs or NFTs? One explanation is so-called FOMO—the fear of missing out. When we see friends and neighbors making gains—like Le Clos seeing Phelps take home yet another gold medal—it can be hard to ignore.
FOMO is a real phenomenon. But there may be another reason investors are drawn to popular investments.
In an excerpt from their new book, Like, authors Martin Reeves and Bob Goodson explain why “like” buttons on social media are so powerful. Human beings, they write, are observant, and we try to learn from one another’s experiences. This is especially true when we encounter people who seem to be traveling the same path. “When we observe others who are similar to us, we have higher confidence that their experiences are relevant to our own journey through life.”
This makes sense. If a friend or coworker figured something out, why reinvent the wheel when we could piggyback on what they’ve learned?
Through this lens, some of the seemingly irrational behavior we see in investment markets may begin to make more sense. Those who appear to be mindlessly jumping on the bandwagon of a popular investment just might be making an intelligent move if they assume others have done the research on this investment.
Unfortunately, there’s a fly in the ointment. Wall Street is a step ahead of us. Marketers know how we think. They know people are susceptible to FOMO and will mimic their peers, so they use these powerful effects to sell us the investments that seem to be the most popular.
If your inbox looks anything like mine, you know what I mean. This year, with gold having gained 30%, sales pitches for precious metals have piled up. The investment industry is very good at selling the flavor of the month.
How can you turn down the volume on these sorts of things? Here are some suggestions.
For starters, it helps to recognize that when it comes to investing, there’s always more than one road to success. Just because someone else is making money with a particular strategy doesn’t mean we need to do the same thing. In other words, try hard to be like Michael Phelps, always looking forward. Don’t worry about what’s happening in the next lane, or anywhere else.
More to the point, if your strategy fits your goals, there’s no need to do anything else. Author Mike Piper illustrates this idea in a recent article. Imagine, Piper says, that you’re on a vacation somewhere and enjoying yourself. That would be terrific—except that it’s probably also true that there might be another vacation you could have taken that you would’ve enjoyed more. Many others, in fact.
That’s always going to be the reality, Piper says. In building a portfolio, “no matter what you pick, there’s going to be countless other options that would have been better.”
But, Piper continues, “as long as your original decision was reasonably well informed, it’s not helpful to spend a bunch of time looking at other allocations, other mutual funds, or other individual stocks that you could have selected instead.” Not only could that lead to regret, Piper says, but also it could lead to performance chasing.
That brings us to another key point. Because Wall Street marketers like to talk about what’s popular, there’s the danger that the investments they’re promoting may be the ones that are near peak valuations. So, almost by definition, if Wall Street is trying to sell you a fund, that may be one to avoid, or avoid at least at this time.
This risk isn’t just theoretical; Jeffrey Ptak, an analyst at Morningstar, has quantified it. Earlier this year, he looked at investors’ results in thematic funds—so called “because they tend to tap into a trend that’s captured the imagination or entered the discourse somehow.”
The results were clear. Over a recent three-year period, “the average dollar invested in thematic funds lost around 7% per year.” Over that same period, the S&P 500 gained 11% a year.
Ptak’s conclusion: “By the time a thematic fund reaches investors’ attention, it might already have been picked over by other investors who had already tapped into the theme. That can leave thematic fund investors holding the bag―that is, an overvalued basket of stocks that courts hefty price risk.”
To be sure, this doesn’t mean you should reflexively avoid everything Wall Street promotes. But caution might be warranted.
In investing, it’s also important to keep in mind both sides of the risk-return equation. In general, risk and return go together, but marketers don’t always go out of their way to point this out. That’s another reason to follow the Michael Phelps model. There might be other strategies that’ll deliver higher returns, but that doesn’t mean those strategies are right for you. Consider Bill Gates.
If you didn’t know who he was, he might look like any other 69-year-old. But, of course, his investment strategy shouldn’t look like anyone else’s. The idea is: Even when you think what someone else is doing might be relevant, the reality is we often know little about another person’s circumstances.
A recent analysis in The Wall Street Journal can also help us turn down the volume on Wall Street marketing. The article described the talent war among hedge funds for top-tier stock pickers. In some cases, funds are offering pay packages north of $100 million to lure top talent away from competitors.
What this tells us is that the number of investors capable of beating the market in any meaningful way is very small. Yes, they do exist, and they may be worth paying for, but they aren’t easy to find. And even when they do exist, their funds typically aren’t open to individual investors. So, when we hear about outsized success stories, we should recognize them as the outliers that they are.
For most investors most of the time, the data tell us that simplicity and low cost are the way to go. Keeping that in mind may be the best way to tune out whatever might be happening in the next lane.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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One truism about FOMO that should be apparent is this: by the time you decide to act due to an overriding fear of missing out, in most cases, its probably already too late.
A number of years ago, I made the decision to stop looking for “the answer” in investing. I discovered, as Adam mentioned, that there is no one answer, and that, in fact, “there are many paths to the top of the mountain.”
Instead of trying to determine what the next Apple or Amazon would be, I would simply own everything in the market, and that way, although I would never beat the market, I could match it. So I purchased VTI and VXUS.
Had I not also made the decision to maximize my social security benefits by delaying claiming to age 70 and supplementing those benefits with additional guaranteed lifetime income, through annuities, I would have also include BND and BNDX.
By owning these four Vanguard ETFs, you basically own everything from everywhere. No more need to worry about FOMO…which is a very real issue…because you aren’t really missing out on anything. Remember, you own everything from everywhere.
Of course then you’ll have to find something to do with all the time you use to waste trying to figure out how to beat the market, before you finally faced the reality that Jack Bogle told us about years ago, that you can’t and neither can anyone else, on a regular basis.
Nice article, Adam. Thank you.
Excellent article, please keep up the great reads and information. Very meaningful. The key is to personally have an investment plan that you know how to work. If you need help get it at a nominal fee at a highly regarded company. Just believe all those who do say, only a very small percentage of folks beat the S&P 500. I am living proof, and learned more and more the older I got, that the S&P 500 would be just fine for my investments. It is the long term saving and compounding that makes it work, not any flash in the pan, or that this stock will be a BIG hit. Best to you Adam and thanks.
Thanks for reminding us that “there is always more than one road to success”. I believe that while decisions many of us HD readers are similar, many of us have followed diverse strategies too, and have done well.
As for comparing our practices with billionaire’s, consider when Buffett disclosed that his advice to wife, should she survive him, was to put 10% into Treasurys and 90% into a low cost S&P 500 index fund. I read many articles which analyzed this advice and concluded it would not be the optimal path for an average investor to implement. First of all, this was never offered as advice to other investors like us. His surviving widow would be quite elderly herself, unlike the average investor who is working and trying to build a nest egg. Secondly, this does not scale. Her cash holdings alone would dwarf the vast majority of portfolios held by investors. (While he has often said around 99% or more of his wealth is in Berkshire, and all shares will be donated, what about the remaining 0.5-1.0% of his wealth which I presume she will inherit? Ten percent of that should be in the ball park of $50-100 Million).
I think the average investor would be better off if he or she regarded FOMO as something to be ignored.
Love this, thanks Adam.
One of my favorite Housel quotes about investing: “know the game you’re playing and play only that game.” Eyes forward indeed.
A couple of quotes I like are “Marketing is the rattling of a stick in the bucket of swill” and “more is spent on marketing than on developing a good product.”
Thank you, Adam, for yet another excellent read — thoughtful and well-researched, the hallmarks of your writing.
FOMO is precisely why I put so much of my assets into index funds.
FOMO is also the reason I made a small bet on bitcoin.
How is the Bitcoin bet turning out? I hope well.