There’s a lot of talk of FOMO at the moment. Fear of missing out. It’s one of the most dangerous emotions an investor can succumb to. And it’s very hard to avoid. It is unpleasant to stand on the side lines while other people make money, smugly and apparently without effort.
But FOMO is the enemy of investment success. It sucks people into markets at precisely the wrong time. It is the cause of bubbles and the reason markets overshoot. If, like Ulysses, you cannot stop yourself listening to the Sirens’ song, you’d better make sure you’re firmly strapped to the mast.
It’s not surprising that investors are starting to believe that the stock market is a one-way ticket. Over the past two years it has not simply bounced back strongly from the pandemic, it has acted as if Covid never even happened. And inflation, rising interest rates, peak earnings? Who cares?
Cast your mind back to the beginning of 2020 when, unless you were an infectious diseases expert, you had almost certainly never used the word coronavirus. If you had invested $1,000 in a global stock market tracker fund in that blissful pre-Covid moment, and then ignored everything you read or saw in between, it would now be worth $1,340. More than 30% in less than two years. During a pandemic. And we are surprised that people are worried they’re missing out?
FOMO is evident wherever you look. It’s your children pretending they know the difference between Bitcoin and Ethereum. It’s the US$2.6trn of leveraged bets, the highest single day’s trading in derivatives, that changed hands on November 5. It’s the bearish hedge fund managers throwing in the towel as they accept that the market can remain irrational longer than they can stay solvent.
This is a difficult time to be an investor. Thirteen years into a bull market, that began when the S&P 500 traded at a sixth of its current level, it’s getting harder to remember that stomach lurching feeling as share prices fell day after day during the financial crisis of 2008.
Anyone who remembers the last time markets really threw caution to the wind, during the dot.com bubble more than 20 years ago now, will know that the best time to be an investor is also the most dangerous. The final euphoric push to the top is agony to miss. But the pain is nothing compared to the shock of missing the turn and tumbling down the other side, cutting your hands to shreds as you try to catch the falling knife.
So, yes, we have been here before. But it is a big assumption, and quite possibly a wrong one, to think that this is 1999 all over again. Quite conceivably it is actually 1995, when Alan Greenspan, then chairman of the Federal Reserve, was warning us all about ‘irrational exuberance’. Maybe he was right, but he was certainly too early. Markets stayed exuberant for another four years.
This week I read a prediction that the S&P 500 would rise over the next five years from today’s 4,700 to 8,000. That sounds preposterous, but it is not a finger in the air guess. It is a possibility based on historical patterns. The US benchmark typically swings from a level well below its long-term trend line to a cyclical peak that is well above it.
In the late 1940s, after the Depression and the second world war, the S&P 500 stood 46% below trend and 20 years later it was 88% above it. In 1982, after the devastation of the 1970s stagflation, it was 53% below that same trend line and in 2000 it peaked 104% above it. In March 2009, after the financial crisis, the index was 47% in arrears; today, it is just 42% ahead. That’s where the 8,000 target comes from. It may sound ridiculous, but it would not be unusual.
There are other reasons to think that today’s FOMO is not the red flag that a growing number of investors believe. First, the exuberance remains relatively contained and focused on a few frothy areas of the market. While there were some ‘old economy’ stocks that failed to participate in the 1999 boom, they were the exception that proved the rule. By the end, pretty much anything was in bubble territory. That’s not the case now.
Second, policy remains accommodative. Excessively so, some observers like former Pimco boss Bill Gross are now suggesting. Third, valuations, again with some notable exceptions, are not eye-wateringly high.
But it would be wrong to ignore the message that the current market environment is sending us. Staying rational in a FOMO world demands self-discipline and clarity about what you are trying to achieve with your investments. Here are three questions to ask yourself if you are starting to feel the fear of missing out.
First, how realistic are my expectations? It is reasonable to expect the stock market to deliver returns in the high single digits over time. The past two years have been a windfall. Don’t expect the next two years to be the same.
Second, how will I feel if the market corrects by 20pc from here? Do I have a sufficiently long time-horizon to shrug that off, in the knowledge that my investments will, in due course, get back on track?
Third, if I am tempted by the siren voices of crypto currencies or meme stocks, am I investing money I am prepared to lose? Have I created a separate pot from my long-term savings for this kind of speculation?
Greed and fear are, famously, the drivers of an investor’s emotions. The trouble with FOMO is that it combines both in a combustible package.
Tom Stevenson is an investment director at Fidelity International. The ideas are his own. He tweets at @tomstevenson63.
