The biggest bull market isn’t in shares of Tesla or cryptocurrencies like Bitcoin, it’s in FOMO. We are in a FOMO market right now. Everyone is making millions, and you’re the only one who’s not! Not so fast… controlling your fear of missing out is critically important. But it’s easier said than done. In this article, we’ll outline three keys to avoiding FOMO-induced decision making in this fast-paced market. The three keys are:
- Setting your own expectations for success
- Creating an allocation framework for your portfolio
- Limiting your time on social media or other FOMO influencers
Define your success
Success in the market means different things to different people. A young person may be trying to grow their wealth as aggressively as possible, while a retiree may be in capital preservation mode. Furthermore, risk objectives like aggressive growth can have nuanced meanings too. One person’s definition of aggressive growth often differs from another’s. The bottom line is that expectations are complicated and it’s helpful if you define them for yourself.
So step one to avoiding bad decisions as a result of FOMO is to define your version of investment success. By defining success you can create a benchmark to measure that success against. For example, do you want to achieve the market rate of return? Then measuring your portfolio versus a benchmark like the S&P 500 is a good place to start. Do you want to attempt to beat the market? Then consider measuring your portfolio versus an actively traded ETF with the same objective, such as Cathie Wood’s ARKK ETF. Are you aiming for less volatility while accepting lower returns? Then research benchmark’s used by popular low volatility ETF’s like USMV from iShares.
If you have nothing to compare your portfolio to then you’ll inevitably compare it to whatever you feel like, whenever you feel like. And that will increase the chances that you start comparing it to an inappropriate benchmark which could ignite feelings of FOMO. Moreover, you’ll be more likely to start investing based on performance and not suitability. But performance is backwards looking and says very little about the potential for future returns. So someone who defines success in the market as making as much as money possible will be prone to chasing performance. Studies have shown that that is one of the worst investment strategies.
If you don’t define success you’ll have no baseline for expectations of success. And you really need that baseline because it will keep you humble and focused when determining if your portfolio is accomplishing what you need it to. At that point, you can observe how your portfolio is performing versus your own expectations. If you don’t do that you’re going to fall into the trap of being jealous of, or trying to emulate, anyone who is doing better than you.
Now, neither are ideal, but if it’s a choice between jealousy or emulation, choose jealousy. Investors have a tendency to view someone else’s performance in a vacuum instead of considering all of the circumstances that are unique to that person. Someone could be doing better (or worse) than you in the market for a variety of reasons. You’re usually only seeing people’s end results and know nothing about what went into them achieving it, or the financial resources or know-how that they have access to.
Creating an allocation framework
After you’ve defined your version of success you can build out a top down allocation framework that can help ensure your portfolio performs in line with your personal expectations. For example, we might run an 80/20 portfolio (80% in stocks, 20% in bonds) for a client who wants to capture the market’s rate of return, but with a little less volatility than the S&p 500. Then within each allocation we build out the portfolio through specific segments of the market, possibly like this:
|Equity Segment||Allocation||Bond Segment||Allocation|
|US Large cap||35%||Treasuries||40%|
|US Mid cap||15%||Corporate||30%|
|US Small cap||20%||High Yield||10%|
|International||20%||Preferred & CEF||20%|
In this case, the clients portfolio is primarily indexed to the market, with the hope that the historical diversification effects of treasury and corporate bonds help dampen portfolio volatility during stock market drawdowns. In cases where someone wants to be more aggressive they have a couple of basic options. They could…
- Tilt the equity portion of the portfolio, overweighting small caps versus large caps, for instance
- Raise allocations to higher risk income categories like high yield bonds or closed-end funds while reducing exposure to safe havens like Treasury bonds
In a case where someone wants to make more concentrated bets, we recommend factoring that into your allocation framework. So instead of being 80% equities and 20% bonds, your top down approach might look like this:
Where the “other bets” category allows for more concentrated risks, such as in individual stocks or thematic ETFs. Now, assuming that the other bets category isn’t much more than 5-15% of your portfolio (we don’t recommend more than that), the benefits of creating this type of category in your allocation framework are twofold:
- It forces you to be selective with what you include in your other bets
- It allows you to speculate in a risk-controlled manner
We ourselves have had some good luck with thematic ETFs like CLOU, IDRV, and ARKG which have been components of our own other bets investment categories. So when we have a client who has FOMO over stocks like Tesla, we can point out that they have actually benefitted from the stock through their other bets exposure. We find that even having very small exposure to an outperforming asset can lead to higher investor satisfaction and less FOMO.
Identify FOMO influencers
FOMO is a bad influence on your portfolio much like hanging out with a divorced alcoholic is likely to be a bad influence on your marriage. Through anecdotal conversations with clients, we’ve learned that social media, especially Twitter, is a key culprit in sparking FOMO. The other? The group chat. As investing has become more democratized, more and more people are participating in the markets. As a result, your friend’s group chat is discussing the stock market like never before. There’s nothing wrong with that either, unless there is. If your best friend sharing a story about making easy money in a hot stock makes you feel bad about your own investments, then you’ve got a problem. Worse, you’ve got FOMO.
Now, you’re probably not going to leave your group chat but you can remind yourself that one person’s success has nothing to do with your success. Remember, your benchmark isn’t the performance of the group chat’s Robinhood account, it’s what you selected for yourself when you were defining your version of success in the market. And that’s why defining your own version of success is so important. If you don’t do that, you’re going to get emotional whiplash. Not from the market, but from all of the different FOMO influencers that you interact with on a daily basis, whether it’s something you see on Twitter or a conversation with your friends.
FOMO will happen
FOMO is something you will feel no matter what, and that’s fine. But bad decisions as a result of feeling FOMO are absolutely avoidable and can wreak havoc on your portfolio. In order to avoid falling for the risk FOMO presents you need to define your own version of success in the market. Doing so will allow you to measure your success against your own predefined expectations. Once you’ve done that, you can build a model allocation framework that aligns your portfolio with those expectations. That way the next time you see someone boasting about a huge profit you can say, “good for them” instead of, “I wish that was me.”
If you’ve been feeling FOMO in the market lately, you’re not alone. Feel free to schedule a meeting with us and we can share other insights we have in dealing with FOMO and ensuring you don’t make any decisions you’ll regret.