Tuesday, July 21, 2015
Fear of Missing Out: An Investor's Worst Enemy
Fear of missing out (FOMO) is an increasingly powerful emotion in our daily lives – so much so that FOMO was officially added to the Oxford English Dictionary in 2013. Have you ever looked at your Facebook feed and been jealous of someone’s picture from a beautiful viewpoint, or enviable of a friend’s photo of their expensive dinner with a strategically placed bottle of fancy wine in the background? That is FOMO – the fear that at any given moment someone is doing something more appealing than what we are doing at the time.
A fear of missing out has always been part of life, but it has become more and more prevalent with the emergence of social media. Personally, I can’t help but check my Twitter feed every hour or so to make sure that I’m not missing out on an article published by one of my favorite financial writers. Yet, social media has increased the power of FOMO more than I realized. For example, I can honestly say that I have absolutely zero interest in horse racing – frankly, I dislike the sport. However, due to all the hype on Facebook and Twitter, I couldn’t help but watch the Belmont Stakes out of fear of missing American Pharaoh become the first Triple Crown winner of my lifetime.
FOMO is frequently a counter-productive emotion, leading to jealousy of others, dissatisfaction with our own lives, and bad decision making processes. Nowhere is the negative impact of FOMO more apparent than in some individuals’ investment strategy. For years, no one has enjoyed going to the neighborhood BBQ only to have to listen to their neighbor brag about how his portfolio has outperformed the S&P 500 index over the last six months. Not only is listening to the boasting annoying, it makes us discontent with the return our own portfolio has achieved and makes us wonder if we should adapt a different strategy (i.e. take more risk right after the market achieved a new all-time high).
Social media has expanded the impact of FOMO on investment strategies. For the last year, the internet has ensured we are aware that large cap indexes like the S&P 500, Dow Jones Industrial Average, and NASDAQ are at all-time highs and achieving appealing returns, and we wonder why our more diversified portfolio isn’t behaving in a similar fashion. It is hard to be content with our diversified strategy when every media outlet is constantly reminding us how we are missing out on the stellar performance that could be obtained if only we had a non-diversified portfolio that invested only in the asset category that is currently in the middle of a hot streak.
When it comes to investing, FOMO is significantly impacted by recency bias. Our fear of missing out becomes more and more intense after the market has just experienced an uptick. If we take a couple of steps back, it is clear why we maintain a diversified portfolio – it provides the most appealing tradeoff between maximizing returns and minimizing risk. Yet, it is hard to remind ourselves of this when it seems like everyone around us is taking advantage of the latest market trends and we are missing out. Of course, changing our portfolio to try and take advantage of a run that has already taken place would be foolish, as we would be selling assets with prices that have remained flat and may now be undervalued relative to the market in order to buy assets that have recently experience significant growth and are likely now expensive. These are the type of decisions that FOMO can cause and we would be wise to avoid this type of thinking.
We have been in this position before. In the late 1990s, people wanted to abandon their diversified portfolio and put a heavy focus on the technology stocks that were making all their neighbors rich. In the mid 2000s, everyone wanted to borrow as much money as possible and utilize the funds to buy and flip real estate. In the early 2010s, everyone was wondering if they should sell their stocks before a double-dip recession began and use the resulting funds to buy gold. In each of these scenarios we were hearing individual stories of others who had implemented these strategies and were doing better than we were. Of course, with the benefit of hindsight, we can see that changing our long-term investment strategy due to a fear of missing out on what was working for a short time period would have been a drastic mistake.