There are two competing emotions I see many investors wrestling with right now:
- Fear - After nine years of positive returns in the stock market, we are due for a downturn and I don't want to lose my gains.
- Fear Of Missing Out (FOMO) - After nine years of positive returns in the stock markets, I need to put all my money in stocks so I don't miss out on these incredible returns.
Most people experience one of these two competing emotions more strongly than the other, but the key to a successful financial future is learning to find a balance between them. We work hard to educate our clients on the realities of investing and the unpredictable nature of market returns. Some of our clients lean towards fear while FOMO is the more prevalent emotion for others. Our job is to help each of them learn to find an appropriate balance.
Unfortunately the vast majority of our population doesn't have someone serving them in this role and as a result we see too many people on the extreme sides of these emotions. This leads to people moving their portfolio to all cash in 2009 or to all tech stocks in 2000. We started to see some evidence of this happening with people jumping into the stock market towards the end of 2017.
This Wall Street Journal article goes into detail about the surge in retail investor activity at discount brokerages towards the end of 2017 and the beginning of 2018. Many investors have been avoiding the stock market since the financial crisis in 2008/2009 and after all these years they are finally getting more aggressive with their investments. Here's a chart that illustrates investor confidence, which is currently running higher than it has in a long time.
(Chart via Tracy Alloway at Bloomberg)
There might be no greater illustration of the power of FOMO than the world of cryptocurrency. You might not fully understand how blockchain works or what a Bitcoin is, but surely you have heard about the incredible rise and subsequent fall in the price of various cryptocurrencies. I've spent a lot of time learning more about this technology and I still couldn't properly explain to you how it works. Far smarter people than myself are convinced blockchain technology will eventually have a very large impact on our world and I won't argue with them. However, I am fascinated by the psychology of bubbles and how quickly people can get caught up in them. I had friends and teenage cousins who never talk about investments asking me about cryptocurrencies over the past few months. Nobody wanted to get left out.
If you haven't been watching the space, Bitcoin soared in price in 2017, reaching an all time high of around $19,000. This incredible rise created many millionaires nearly overnight and had everyone talking about how to get in on the action. As much as we might say we are happy when a friend becomes an overnight millionaire, everyone regrets not having the same foresight as that friend. This triggers the FOMO emotion and drives people to jump in, even though the price has already gone through the roof. If you are investing based on the fear of missing out, you've probably already missed out.
The next time you feel like you are missing out on something or are fearful about the markets, take time to step back and think about what is driving that feeling. Do you have a financial plan in place to help you reach your long-term goals? If not, now might be a time to do that. Having that financial plan will provide you the peace of mind to stop worrying about a market drop or missing out on huge returns. We can help you develop that plan and we can help you stick to it regardless of what happens in the markets. Set up a meeting with me and I'd be happy to discuss it with you.
And as far as Bitcoin or any other cryptocurrency goes - feel free to indulge your curiosity with some fun money, but I wouldn't recommend you rely on it in your financial plan.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.Please see Additional Disclosures more information.