I remember that back in my early twenties I never missed a weekend of socializing with friends. It was a well-established routine. I would work all week, hang out all weekend - and I mean every weekend. Obviously, I loved being around my friends and still do to this day. However, I now realize I can catch up with them a handful of times each year and have just as much fun.
One of my deciding factors for socializing was fear of missing out (FOMO). I always felt that something incredibly exciting might happen, and I couldn’t risk missing out on that excitement. I have now come to realize that while exciting things may happen while I'm not present, there will always be another time, and I shouldn't make my decision purely based on FOMO.
FOMO is present in many aspects of life, but it's especially prevalent in investing. Many investors consistently buy when the market is trending upward at a fast pace. They worry they may miss out. They hear stories from fellow market participants who are doing well, and they too want to experience that feeling of euphoria. Don’t get me wrong, it's quite okay to buy as the market is skyrocketing - provided you have a plan and are not investing solely based on FOMO.
After witnessing a year such as 2017 - and many other strong years since the Great Financial Crisis of 2008 - people began to feel like they might get left behind if they didn't react quickly. They had to get a piece of the action. Like I said: There's nothing wrong with investing at such times, as long as you don't have unrealistic expectations. Know that markets don't move in a straight line, and any given price level may be revisited multiple times, over extended periods.
In the financial news, we constantly hear about x gain or x loss in the stock market on any given day. So, let's put some context behind those sound bites. They're speaking about the stock market in generalities, not based on the specific time frame or portfolio of each individual investor. For visual purposes, I've included a chart of the S&P 500 below. The period illustrated is from January 2017 through February 2019.
If we look at the chart above, we can see that the market tends to revisit prior price levels. I’ve marked a red line on the left side of the chart, which shows the price level that the S&P 500 was trading at in October 2017 and February 2018. You will also see that toward the end of 2017, the price started to move up at a much faster pace as excitement increased. This lasted through the end of January 2018, immediately followed by a sharp sell-off. During the February 2018 sell-off, the market returned to the October 2017 price levels.
On the chart above, I’ve also labeled a more recent period: June 2018 through February 2019. This can be seen on the right half of the chart marked by the pink line, dates and arrows. Again, just as with the previous period, we can see that the market has revisited the price level where it traded back in June of 2018.
The reason for pointing this out is to show that FOMO can end up costing you more than helping you. Imagine you got overly excited at the end of January 2018 or at the highs in September 2018. Most likely, you gained little by rushing your decision based on the excitement generated by rapid upward movement.
For the lucky ones who entered the market at the December 2018 low, the rally through February 2019 is impressive. Although, you might feel differently had you entered over the prior 6 to 12 months. For those who didn't catch the bottom, this rally has merely recouped some losses.
In the charts below, I’ve illustrated the performance of the S&P 500 over 6- and 12-month time frames. As we can see on the first chart below, over a 6-month period, the S&P 500 is still in a draw down of -3.30%. The second chart below shows that over a 12-month time frame we've gained a mere 0.36%. We've had a large amount of movement, but the progress made is only impressive over a shorter and more recent time frame.
6-month performance of the S&P 500 (September 2018 through February 2019)
12-month performance of the S&P 500 (March 2018 through February 2019)
So, here we are again. The S&P 500 is approximately 18% higher (or maybe higher still by the time of reading this) than its December 2018 lows. The financial news and sentiment from fellow investors are that we've dodged a bullet and can only go higher from here. This may be true. Or we may be primed for another pullback. Only time and hindsight will be able to give a definitive answer.
What I can tell you is that the stock market has been around for centuries and will not suddenly disappear. There will always be opportunities. However, you would be wise to follow a predetermined plan, stick to a strict set of rules and not allow FOMO to be the tool you utilize to make investment decisions.
We are playing the long game. Therefore, think long-term and realize you can get to the same destination via multiple ways. FOMO, though, may cause unnecessary stress and disappointment. If you would like to find out more, click here.
The indexes mentioned in this communication are unmanaged and not available for direct investment. Past performance is no guarantee of future results. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information contained in this commentary has been obtained from sources that are reliable. This presentation is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.