One of the more difficult aspects of being an investor comes from the fact that we often have competing emotions depending on where we are in the market cycle.
There’s fear and greed. Overconfidence and loss aversion. Panic and euphoria.
We’re often told there is nothing more important than being disciplined in your process…except maybe being flexible. You know, skate to where the puck is going but let your winners ride.
There are also two types of fear when it comes to investing:
(1) The Fear of Missing Out (FOMO)
(2) The Fear of Being In
In March, it would have been impossible to ignore the gnawing fear of being in risk assets as they were getting demolished.
That fear of being in quickly morphed into the fear of missing out now that stocks have come roaring back.
FOMO is even more acute when certain areas of the market are performing far better than others. You wouldn’t be human if you didn’t at least consider why you don’t have your entire investment portfolio in tech stocks right now.
They just went through one of the most dominant runs in history — outperforming in the bull market, outperforming during the bear market, then outperforming in the recovery from that bear market.
You’re lying to yourself if you haven’t thought about selling everything else and simply buying Apple, Amazon, Microsoft, Google and Facebook.
Some investors are comfortable taking on an extreme position like that but not me. Here’s how I personally deal with FOMO when watching such an amazing run as we’ve seen in tech stocks:
Total market index funds. My biggest individual holding is a Vanguard Total U.S. Stock Market index fund. The biggest holdings in the U.S. stock market are, you guessed it, Apple, Amazon, Microsoft, Google and Facebook.
Market-cap-weighted index funds are a winner-takes-all strategy. Owning the entire stock market means you will always own the biggest publicly traded companies, for better or worse. There are times when this type of strategy doesn’t work but when it does you don’t have to worry about missing out on the big winners.
I also own a position in the Nasdaq 100. Instead of trying to pick the individual tech names I just own a basket of them.
Trend-following. I have roughly 20% of my portfolio invested in a trend-following strategy. Trend strategies also rely on a let-your-winners-ride mentality and this one is completely rules-based so it takes the emotions out of the decision-making process.
Buying when stocks are down can be difficult because they could always go down further but holding stocks when they’re rising can be just as challenging. It’s tempting to take a shot at selling before a peak but I never want to get caught playing that game because it’s one you cannot win consistently.
I would rather let the market dictate what is happening rather than try to guess what’s going to happen next.
My fun portfolio. I have a brokerage account at Robinhood that makes up 5% or so of my overall portfolio. This is the only portion of my money where I’m comfortable picking stocks. It allows me to make some investments outside of the more boring, rules-based strategies I employ in the rest of my portfolio.
I hold a handful of individual stocks and ETFs in this account and most of them are tech stocks. This portfolio scratches that itch for me as a behavioral release valve.
Bitcoin. I made a small bitcoin purchase in early-2017 just before the mania took off like a rocket ship. I didn’t fully understand it back then (and still don’t totally now) but didn’t want to be left out of this one. So I rode it all the way up and then held through the crash and still hold today.
I’ve dollar cost averaged since then but always limit myself to $100 a purchase so I don’t get carried away.
Even though it’s a tiny part of my portfolio the FOMO was stronger than the fear of being in. I’ll probably hold onto it for a very long time.
Know what I own and why I own it. There are plenty of other parts of my portfolio I’ve hated for a while now. I’m not angry, just disappointed in my holdings in foreign, emerging market, small cap, mid cap and value stocks.
They haven’t kept pace with the broader U.S. stock market and have been trounced by the tech sector.
Would it have been better to have all of my money in mega cap tech stocks? Of course! But that assumes I’ll be able to navigate the turn when something else takes big tech’s place as the top performer.
I don’t have the ability to pick the best performing sector consistently or have the wherewithal to choose its successor when something else goes to the front of the line.
It’s a feature, not a bug that diversification helps you avoid tail risk events but those tails are to the upside as well as the downside. Diversification leaves you equal parts appreciative and remorseful in that helps you avoid strikeouts but also home runs.
You own just enough of certain investments that you wish you would have owned more and just enough of other investments that you wished you owned less.
The reason I’m comfortable with this strategy is because nothing lasts forever in the markets. Tech stocks will pass the torch to a new top performer at some point.
Now if I could just get the timing right on when that will be…