In 1999, two of my favorite clients fired me as their financial advisor.
It was a young husband and wife. I handled the husband’s father’s money for more than a decade.
The father passed away a few years before, and the couple inherited the estate. It was a LARGE sum of money – large enough that if we earned 10% per year on the assets, this couple could live off the earnings and never have to work again.
In 1999, the various conservative mutual funds I recommended they invest in earned 58%. It was far more than we had projected. It was far more than they needed to maintain their standard of living.
But, the Munder NetNet Fund their neighbor invested in – which only bought internet-related stocks – earned three times that amount.
The couple told me they wanted to sell the funds I recommended and put everything into the Munder NetNet Fund.
I reminded them of their long-term goals. I told them that 1999 was an “outlier” year. Just about everything made money. They had made far more money in their conservative funds than we had projected. It wasn’t likely to happen again anytime soon.
And even though I would have profited handsomely on the commission earned by selling their existing funds and buying the Munder NetNet Fund, I told them not to do it. In fact, I refused to do it.
So, they fired me. They took their money to another broker who did exactly what they wanted to do.
Over the next three years, the conservative funds gained an average of 9% per year. The Munder NetNet Fund lost an average of 27% per year.
The couple’s money evaporated. Their financial security disappeared.
Had they simply stuck with the plan we had set up to make 10% per year over time, they would have been just fine. They never would’ve had to work again. They’d never have any financial concerns. They could’ve raised their family with all of the benefits that financial independence provides.
But that wasn’t good enough. Their neighbor had made more and that wasn’t acceptable. So, they threw away the strategy that worked best for them… and rolled the dice on a more aggressive posture.
That’s the danger of FOMO – Fear of Missing Out.
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Whenever there’s a hot trade in the market, whenever an asset class captures the headlines for producing HUGE gains, the automatic response for most investors is, “Damn! I have to jump on board.”
To them, valuations don’t matter. Logic doesn’t matter. All of the time-tested market-based fundamentals don’t matter.
All that matters is… “This asset is moving higher. My friends and neighbors are making more money than me. So, I have to get on board.”
It’s a classic FOMO event.
Folks… I have to tell you… FOMO will destroy you.
If your neighbors are making money, then good for them. If Biff and Muffy at the holiday cocktail party are bragging about their HUGE profits in cryptocurrencies, then good for them. That’s wonderful. You should be glad that your friends, neighbors, and in-laws are doing well. Prosperity is a good thing.
But, when logic doesn’t support the trade – or when your own financial objectives require a more conservative stance – then chasing the trade is a mistake.
You should focus your investing and trading strategies on what is right for you. That means you’ll underperform your neighbors in some years.
But who cares? As long as you meet the performance necessary to achieve your long-term goals, then it’s a win.
I’m a trader. My immediate objectives are to make profits on short-term trades. But my recommendations fall within the constraints of a longer-term objective. And in the longer-term, it’s the contrarian – or less popular – trades that will generate the largest gains.
Logic and reason always win out over emotion.
Chasing performance… chasing the hot idea… is almost always a bad idea.
Traders who rush to get into trades simply because it’s the hot idea of the moment, or because their neighbors are profiting, are making a mistake.
If the trade doesn’t have a fundamental backing… if it doesn’t fit with your overall longer-term strategy… then it’s not likely to turn out well.
So, when it’s time to sit on the sidelines, I don’t mind telling folks to do so until a better opportunity arises.
The FOMO is intense. I feel it every day when I read emails from my subscribers.
We don’t need to chase any trades just to keep pace with the neighbors.
FOMO will argue otherwise. But I have more faith in the profitability of an anti-FOMO trade.
Best regards and good trading,
In today’s mailbag, readers share their thoughts on social security from Jeff’s Monday essay…
Jeff, you have hit the nail on the head on what’s been happening for 100 years to all the working people.
Of course, I’m not an expert on social security (SS). However, despite the accuracy of your article, the system wasn’t designed to make participants money.
No doubt many of us could do much better if we could invest the SS withholdings, but more to the point, most American workers could not. It’s a forced savings account that’s meant to keep people off the dole when they retire.
There’s no way to predict anyone’s financial future. The system isn’t perfect, but it’s better than the alternative (as is democracy).
Jeff, I thoroughly enjoyed your missive about social security. I posted a similar essay on Facebook a few weeks ago. It is shameful that we who are contributing to social security and/or receiving social security are treated so poorly! What really frosts me is that there are those, especially in Congress, who call this an “entitlement.”
First off, they confiscated our money. Then, they changed the rules so they could spend our money on government giveaways rather than hold it in escrow for the contributors. Also, they restricted the investments available to the social security administration to U.S. Treasuries, then took those returns to damn near zero to fund their outrageous spending!
If they had only allocated about 50% of the social security funds to an S&P 500 ETF, the social security benefits could be dramatically increased, AND the fund would be far from bankrupt. Just saying. Keep up the good work.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].