F.O.M.O. and Loss Aversion
By: Mike Earl, CFP®, CPWA®
FOMO is an acronym for “fear of missing out”. Urban Dictionary defines FOMO as “the fear that if you miss a party or event you will miss out on something great.” I’m not too proud to admit that I wrestled with some FOMO as a youngster. In the world of social interaction, FOMO is not a helpful trait to possess.
But in the world of personal finance, the FOMO term could take on a new and helpful meaning.
I think more people would be well-served by cultivating a little fear of missing out (FOMO) on bull markets. Many people are so worried about the potential for losing money in a down market that they ignore the prospect of losing money by not being invested in a long-running up market.
This is not to say that risk management and downside protection are unimportant. They are both very important. But in the quest to reduce risk, some people end up missing out on a lot of wealth-building that could have been had through diversified investing in global stock markets.
There is a human physiological underpinning for our collective obsession with potential losses. Loss aversion is a well-known and well-studied human behavioral bias. “Loss aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains: it's better to not lose $5 than to find $5.”
Another factor at play here can be personal political convictions. We often remind our clients that we do not let personal political beliefs impact our investment philosophy. And our clients should not let their political beliefs impact whether or not they continue saving and investing for the future.
The average annual return of US stocks since 1926 is 9.9% (stat via University of Chicago, here). That time period saw our country go through the Great Depression, World War II, the Korean War, the Vietnam War, the Cold War, 9/11, the Iraq War, and the Great Recession. That’s a lot of really scary stuff, and yet investing $1,000 back in 1926 would be worth more than $5,500,000 today. Astonishing growth.
What does this mean to you, our client?
Continue being an investor. If you are still accumulating assets, focus on increasing your savings rate each year. If you are distributing your assets, seek to maintain an appropriate distribution rate from your portfolio (as we coach you on each year). Try not to focus on short-term stock market performance. Instead, remember that we have a long history of asset growth through investing in business around the US and abroad.
Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.