Don’t succumb to the latest trends. Say no to FOMO.
Key Takeaways
The last 18 months have been quite volatile. Some have felt they had too much (or too little) exposure to the stock market, cash, and/or tech stocks.
Fear of Missing Out (FOMO) is one of the most powerful behavioral biases that causes financial plans to go awry.
Now more than ever, it’s important to stick to your plan and keep your time horizon and risk tolerance in focus.
I came across this article in the Securities & Exchange Commission newsletter blog (Say NO GO to FOMO) about overcoming a powerful behavioral bias called “Fear of Missing Out” (aka FOMO). It’s the feeling you get when you drive past a huge Holiday party on your street to which you weren’t invited. Or knowing your friends are gathering at a popular bar, restaurant, or vacation spot while you’re home with the flu. Social media only makes FOMO worse with everyone’s curated photos of only the best moments of their lives. The same thing happens with investing when the financial media inundates you with hype about the latest tech stock, growth stock, crypto, or real estate play.
2023 was an unusually heavy year for FOMO as we saw both a 20% run-up in the stock market as well as a 10% correction. And that’s on top of 5% rates on risk-free cash--the highest we’ve seen in many years. In the space of a few months, we’ve had clients and prospects inquire if they have too much exposure or too little exposure to the stock market (especially tech), as well as too much and too little in cash.
Now more than ever, I want to stress the importance of sticking to a carefully designed plan and remaining fully diversified. If you’re well-diversified, you already have the Magnificent 7 mega-cap tech stock in funds or ETFs. But those names are pricey and we’re certainly not over-weighting our clients toward tech.
It’s not uncommon for clients to ask us to look into a stock they heard touted by financial pundits on TV. The pundit doesn’t know your family situation. He or she doesn’t know your financial goals, risk tolerance, or time horizon. So how can the pundit possibly know if a stock is a “good investment” for you? Those shows are too generalized.
One thing I love about my job is that everything we do for clients is highly personalized. We don’t take a general cookie-cutter approach to anything we do for clients. That’s the difference between our firm and a huge broker-dealer in which each “advisor” has 500 to 1,000 clients.
Real-World Example
Toward the end of 2021, one of our new clients stormed into the office anxious to load up on Netflix stock which he’d seen hyped on the news after a recent minor dip in its stock price. He said he had a “good feeling” about the stock recovering quickly. His enthusiasm reminded me of the “good feeling” people get who regularly bet on sports, horse racing, and lotteries. Hunches rarely turn out well. We reminded our client that he was simply speculating, not investing and that he already owned plenty of Netflix in the index funds he held. So, we talked him out of buying more and he later thanked us when he saw how far it had dropped.
Allowing Emotions to Dictate Investment Choices
The same thing goes for annuities. Ads for annuities tend to spike when the stock market and/or economy is doing poorly. That’s when retirees and other sensible folks may succumb to the temptation to have a “fixed predictable stream of income for life”. In most cases, we have far better tools for accomplishing the same things that annuities promise, and we can do so with much lower fees and fewer restrictions. Sometimes new clients come to us with annuities in place. One of the first things we do is help them surrender the annuities if possible. Within 10 minutes of looking through their contracts, we can usually spot at least a handful things that are NOT suitable for them, so it’s often not a difficult conversation.
Commercials for gold and other precious metals are another thing that floods the airwaves when the markets are volatile. Retirees can be especially susceptible to the commodity pitches because the message is playing into their current fear of a poor economy or stock market. Having more free time than working people to watch the news round the clock (and worry) is not good for your investment outcomes. Remember, these pitches are to sell a product. When fear is high, that is when sales are the best. Again, we explain why these potential fixes are detrimental to good outcomes and that there are better tools at your disposal for protecting your principal during volatile times and for generating consistent income on which you can live comfortably.
Deep down, clients know that investment opportunities they see touted on TV and online are not why they come to us. They may own a business and may have other risky investments on their own. They come to us for a strategy that is carefully planned and that will provide them with the growth and/or income they need in retirement. This is what enables them to sleep well at night, regardless of what’s on the news.
Conclusion
If you or a family member has concerns about your asset allocation or retirement strategy, reach out at any time. We are happy to assist. It’s all part of our holistic, comprehensive planning process.
BRENDEN LEESE, CFP® is an Associate Wealth Advisor at Novi Wealth Partners