Avoiding Investor Pitfalls – Fear of Missing Out
Those suffering from FOMO are more concerned about their performance relative to others than they are about the potential damage of high-risk investments on their financial plan. It’s time to overcome that fear!
Contributed by Doug Walters , Max Berkovich ,
Last week we began our three-week series on investor pitfalls with risk aversion (Avoiding Investor Pitfalls – Risk Aversion). Today we move on to the Fear of Missing Out (FOMO), a force powerful enough to create bubbles and manias. With so many shiny objects vying for investor attention these days, FOMO is everywhere you turn.
At one point in human history, following the herd was a good survival strategy. There is wisdom in numbers, and there is safety in numbers. But somehow, this same concept does not always translate well to investing. Herd mentality and FOMO have led to some spectacular bubbles historically. You need only look back to the dot com bubble. In the late 1990s, suddenly, everyone was a technology expert, and watercoolers converted from centers of gossip to investment clubs. Everyone knew someone who knew someone who got rich on a hot tech tip. FOMO was in high gear. For most, that story did not end well.
FOMO is not all about bubbles, though. The wealthy investor, who hears his golf partners talking about a new hedge fund and dives in, is also a victim of FOMO. How else can we explain the continued interest in hedge funds despite high fees, long lock-up periods, illiquidity, custody risk (think Madoff), and their historical underperformance as an asset class? Sounds excellent; sign me up!
Today, with shiny objects abound, FOMO risk is elevated. Stories of riches made on cryptocurrencies, NFT art, and meme stocks are around every corner. These asset classes lack solid investment fundamentals, and all rely on the Greater Fool Theory (i.e., I can make money on this because there is a greater fool than I who will pay even more).
“How else can we explain the continued interest in hedge funds despite high fees, long lock-up periods, illiquidity, custody risk (think Madoff), and their historical underperformance as an asset class? Sounds great; sign me up!”
So how do investors avoid FOMO? It is not easy but think about your investments relative only to you. Those suffering from FOMO are more concerned about their performance relative to others than about the potential damage of high-risk investments on their financial plan. Is your current asset allocation appropriate to meet the goals of your plan? If yes, then stop worrying about what others are doing. It is a long-term game, and if you stick to your plan, you will have missed out on nothing!
Headlines This Week
Despite a rocky start, US Stocks ended the week up slightly in what was a big week of headlines. Not only did investors face an important announcement from the Fed, but they also had to contend with contagion risk out of China.
The Federal Reserve FOMC meeting wrapped up on Wednesday, and Chairman Powell updated investors on their plans for asset purchases and rates.
- The Chairman confirmed that the economic environment supports commencing tapering of asset purchases as early as November. The Fed has been stimulating the economy by purchasing bonds to keep longer-dated interest rates low.
- The other stimulus dial the Fed has been turning is keeping the Fed Funds interest rate low. Rate hikes are on the way, but probably not this year. Fed policymakers were split between one and two hikes in 2022 and three and four hikes in 2023.
- Notably, the stock market reacted positively (or at least not negatively) to the tapering announcement, so taper tantrum fears are at bay for now.
Stocks had a rough start to the week as investors fretted over contagion concerns from the potential default of Chinese property developer Evergrande, which has over $300B in liabilities.
- To put that in perspective, Greece’s restructuring in 2012 was about $200 billion, and Lehman Brothers had about $600 billion in debts when it filed for bankruptcy in 2008. However, the comparison to Lehman is not fair as these numbers do not adjust for inflation, and Evergrande’s tentacles do not have nearly the same global reach as Lehman.
- While China does not appear too sympathetic to Evergrande’s cause, investors took comfort later in the week that the Chinese government was doing what it needed to avoid contagion by injecting liquidity ($71B at last count) into the market. Contagion concerns dissipated.
The Week Ahead
Be on the lookout for a barrage of important US data releases over the next week.
- On Monday, durable goods orders are out, giving insight into production activity.
- 2nd Quarter GDP will be out Thursday, with expectations for continued strong growth at an annualized rate of 6.6%.
- Wrapping up the week will be a busy Friday that will see personal income, personal spending, and the Fed’s favorite inflation measure, personal consumption expenditures, all released.
- There is an expectation of another increase on the inflation front with a jump of 0.4% month-over-month, with the total year-over-year number at 4.2%.
The Big 4
Next Tuesday and Wednesday, the heads of the four largest central banks in the world will meet at the virtual European Central Bank (ECB) Forum on Central Banking.
- Fed Chair Powell, ECB President Christine Lagarde, the Bank of England Governor Bailey, and the Bank of Japan Governor Kuroda will be in attendance.
- Day one will focus on micro and macroeconomic perspectives on corporate indebtedness, while day two will look at structural change and the implications of climate change for monetary policy.
Germans will head to the polls on Sunday to elect their next government, while Japan’s ruling party will elect its next party leader.
- After Angela Merkel’s 16-year tenure as Chancellor of Germany, the country will elect a new government whose leader will become the next Chancellor.
- If the polls are correct, the more liberal party will replace Merkel’s more conservative one.
- Regardless, expectations are that neither party will gain a full majority, meaning a coalition government made of two parties will need to be formed.
- In Japan, the ruling party will host its leadership election on Wednesday in which the winner will become the next Prime Minister of Japan.
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