July 15, 2021
Fear-of-missing-out is a very real emotion – but it can derail your portfolio
Every day we’re bombarded with reports of what’s hot and what’s not – fueling a fear-of-missing-out (FOMO) on some great investment opportunity. Heck, there is even a new exchange traded fund with FOMO in its name. But a diversified portfolio is a well-known way for you to manage your returns while mitigating risk.
The anxiety that we feel when we believe something better is happening elsewhere isn’t unique to investing. Fear of missing out is a phenomenon that affects many aspects of our daily lives, and it’s far more prevalent than you may think.
Indeed, FOMO was added to the Oxford English Online Dictionary in 2013, along with such other contemporary expressions as selfie and twerk. The emergence of social media has only compounded the FOMO effect.
How FOMO affects the way you think about your investments can be worrisome. This summer, as we start to gather again at neighborhood barbecues, you are likely to hear some neighbor bragging how his portfolio outperformed the S&P 500 Index so far in 2021. Almost immediately, you might be dissatisfied with your portfolio and wonder why it wasn’t achieving the same results.
You might get just as upset with your diversified strategy when every media outlet is constantly reminding you about the stellar performance of some particular stock or sector. There’s a huge temptation to change course and invest in the latest hot streak. Fueling the urge is so-called recency bias, a belief that recent financial trends will continue.
But changing your portfolio to take advantage of a run that has already taken place may prove to be foolish. Think about it: You would be selling assets that may be undervalued relative to the market in order to buy assets that have scored huge gains and are likely more expensive.
Moreover, history is littered with examples of hot trends gone cold. In the late 1990s, many investors wanted to abandon their diversified portfolios and buy booming technology stocks. In the mid-2000s, it seemed everyone wanted to borrow money to flip real estate. A few years later, investors were worried about a double-dip recession and wondered if they should sell their stocks and buy gold instead. Now, cryptocurrency is all the rage.
In each case, it seems that FOMO caused investors to be more afraid of missing a bull market than suffering large losses. In hindsight, changing your long-term investment strategy might have been a drastic mistake.
When everyone from those in the media to your own acquaintances tells you to place heavy bets on one or more investment categories that have recently done well, don’t be fooled by FOMO. You could lose big. That’s why a diversified portfolio strategy can help you work towards long-term financial independence.
How does a wise investor avoid falling prey to FOMO? It may be helpful to keep in mind the adage: “If it sounds too good to be true, then it probably is.”
To mitigate losses due to FOMO, your next move is to consider diversifying your holdings. Diversifying your assets among various types of investments and asset classes allows you to get a better risk-adjusted return. You spread the risks around. Over the long term, you may reap the benefits of many investment sectors, rather than potentially suffering massive losses when a bubble bursts.
Your financial professional can assist with diversifying your investments by helping you invest wisely in various asset classes. Your financial professional can also help you combat your FOMO.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
This article was prepared by FMeX.
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