The fear of miss­ing out

When in­vest­ing, it is im­por­tant to keep a long-term view and keep in mind what drew you to an ex­change­traded fund or a stock in the first place. Don’t let your­self be­come dis­tracted and don’t get caught up in an end­less hunt for the next big thing.

Finweek English Edition - - Market Place - By Si­mon Brown ed­i­to­rial@fin­week.co.za

most of us suf­fer from FOMO – the fear of miss­ing out. As hu­man be­ings, we’re hard-wired to chase per­for­mance. From our cars to our break­fast ce­real we want the fastest, best, new­est, most im­proved, and so on. Maybe this is be­cause mar­keters know ex­actly which but­tons to push or per­haps it's just an in­nate hu­man trait. What­ever the rea­son, we’re ter­ri­fied of miss­ing out on the next trend.

But this trait leaves us like a dog chas­ing its tail. We’ll never truly catch it and if by some odd­ity we did man­age to catch our tail, then what? We’d just start chas­ing it again. We are never happy. We are al­ways look­ing for the next big thing.

So, it is no sur­prise that we also chase per­for­mance in our in­vest­ments. No­body cares about a stock un­til it sud­denly starts mov­ing higher. Then every­body wants to know more. How high can it go? Which is the next big stock? Is it too late to buy?

We’re also con­sis­tently check­ing our ex­ist­ing in­vest­ments and com­par­ing them against oth­ers. And when we’re buy­ing new in­vest­ments it’s mostly about per­for­mance – no­body buys from the bot­tom of the per­for­mance ta­ble. We al­ways start our search by look­ing for the top per­form­ers.

All this hype around per­for­mance, and typ­i­cally short-term per­for­mance, is not good for us. I just got an email from a reader who owns an ex­change-traded fund (ETF) that has added about 6% since they’d bought it, but the reader is very con­cerned be­cause an­other ETF has done more than dou­ble the re­turn over the same pe­riod and now they want to know if they should switch.

But this ques­tion misses sev­eral im­por­tant points.

1. Con­sider the level of risk you can take on

Was it the in­vestor’s in­ten­tion to buy the ETF that would pro­duce the best re­turns? That is un­likely as that would have en­tailed a mas­sively risky triple-geared ETF is­sued over some ex­change or as­set that likely no­body had ever heard of and that would more likely crash than in­crease in value. So, we must ac­cept that we’re buy­ing within a com­fort zone of risk we’re happy with and that we are un­likely to have the ETF of­fer­ing the best re­turns. And that’s fine, we want some risk, that’s why we in­vest, but we want to be ex­posed to man­age­able risk, not the sort of risk that could bank­rupt us.

2. Why did you buy a par­tic­u­lar ETF?

So, then the ques­tion is why the ini­tial ETF was bought. Usu­ally the an­swer is be­cause the ex­pected re­turn was go­ing to be su­per-hot and mas­sively wealth-cre­at­ing in dou­ble quick-time. But this is not an an­swer. An ETF is se­lected ac­cord­ing to a num­ber of cri­te­ria, such as the mar­ket or as­sets it cov­ers, its cost, di­ver­si­fi­ca­tion, whether it is off­shore or lo­cal, among oth­ers. Most of the time we may not hold the best­per­form­ing ETF, but if we se­lected it care­fully, the prod­uct we are hold­ing is of a high qual­ity and its per­for­mance will im­prove even more over time.

We want to be ex­posed to man­age­able risk, not the sort of risk that could bank­rupt us.

3. Fo­cus on the long term

Time is the other im­por­tant point. The com­par­i­son pe­riod from the reader above was over just more than six months. Now, six months is noth­ing in the long-term world of in­vest­ing. This is a big is­sue; we buy for long term but mea­sure over the short term? Our buy­ing and mea­sur­ing needs to be in sync, with both fo­cused on long term.

4. Don’t panic if you did buy the wrong prod­uct

Now, of course it is pos­si­ble we did buy the wrong ETF but this is eas­ily ad­dressed. We need to re­visit why we bought it in the first place. Were we mis­taken? Has some part of our rea­son­ing changed? Has our risk pro­file changed? But we need to avoid con­stantly check­ing per­for­mance and wor­ry­ing that we’ve erred if we’re not win­ning ev­ery day.

Of course we need our port­fo­lios to per­form, oth­er­wise we could stop try­ing. But we need to tread care­fully and give our in­vest­ments time to give us that much-de­sired per­for­mance, re­vis­it­ing them ev­ery year or so to make sure they still match our in­vest­ment cri­te­ria. ■

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