FOMO and greed is something that people feel when they feel they are missing out on things. It is a problem in our society. Social media perpetuates this feeling of need, and we surrender ourselves to the fear of missing out. In the investing world, we see people chasing returns. More than likely, chasing returns is a loser's game. So why do we do it?
FOMO, or the Fear of Missing Out.
FOMO is the fear of missing out. This is the emotion we get when we hear about our friends doing something awesome and we had missed out. Fear is the word that we need to focus on.
Since fear is controlling this emotion, we are therefore captives in this world of wanting to fit in, be with the cool kids, and hopefully not miss out on the next greatest thing.
FOMO can influence our decisions. We are now wanting to be in the IT crowd. If everyone has a new iPhone, I must have one too. That is the mentality of the FOMO crowd.
The sad part is people are not satisfied with this mentality. They strive to fit in, but still feel an emptiness. Maybe the answer would be more money.
Often it is said “money doesn't buy happiness.” The FOMO crowd may beg to differ with lavish cars, big houses, and fancy gadgets.
How to obtain all this money is another subject? Let’s focus on chasing returns.
The FOMO crowd wants to chase returns of high flying stocks, funds, investments, and anyway to create lots of wealth really quickly.
In 2020, the market had a nice crash of 35% and after that the market was flooded with lots of stimulus cash, people with time, and the FOMO began.
Tesla skyrocketed and people wanted in, driving the price to as high as $1500 before they split the stock, and the stock continued to rise until it hit a $1 Trillion market cap.
The hype of the stock kept driving people to want more. Some had sound technical analysis of the potential of Tesla, others saw the high rising stock and thought this is how to become rich.
The New Highs and New Players:
In 2020, we have seen new highs with new players in the game.
Cathie Wood and her ARKK fund has been surpassing all. The fund has gone up over 150% in 2020 alone. It was started in 2014 by Cathie Wood in a tiny Mutual Fund company. Through taking risks and betting on companies like Tesla, Cathie Wood has created a name for herself and the ARKK innovation fund.
We have all seen this movie before. In reality, this never ends well when people are chasing the returns.
As people see these highs, they have flooded this fund with so much capital. Peter Lynch made a name for himself with the Fidelity Magellan Fund when he was averaging 29% annually from 1977-1990.
Fidelity found the average investor in the fund actually lost money. People see the highs, chase the returns, and end up selling if there is a bad day. Resulting in lost capital.
Another New player is the Cryptocurrency Market:
When everyone and anyone is talking about crypto it means to beware. We have seen this before. It is like your trash man giving you advice on how to invest in the best crypto currency. Your trash man may know a thing or two, but it is scary to see the greed and FOMO that is occurring with every step of the way.
Bitcoin hit an all time high of $56,000. Wow! That is a lot of money, and bitcoin millionaires have just appeared from nowhere. A few days later the market drops 15% dropping close to $10,000 in a matter of days.
People that invested at $56,000 all of a sudden lost big time money.
People are starting to chase these returns. As we can see, chasing the returns is a loser’s game.
The Hype of Game Stop:
The GameStop squeeze was something that made few rich, lost money for others, and destroyed some people’s hopes in the market.
It all took some FOMO, sprinkled with hype, and the promises of riches.
GameStop soared for about a day, destroyed some hedge funds and then as people sold the overhyped stock, others jumped in hoping for it to skyrocket.
This is when people really do lose money. They watch people get rich, and want to join in on the get rich quick schemes.
What Warren Buffett advices:
1. One piece of advice is “Never invest in a business you can’t understand.”
If you were to invest into crypto without knowing how it works, then you may have a rough time with the investment.
One of the worst things to do is to put your money blindly into something that you don’t know what it is. This is how people lose money.
2. Warren Buffet says “Our favorite holding period is forever”
Buffet recommends people to think twice about holding stocks for the short term. Your investments should be part of a long term strategy.
3. “Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.”
People are often influenced by the media, the hype, and anyone and everyone screaming hoping for a big pay day.
The person that has less emotion invested in their investments is the person that will do the best. Temperament of an individual can really determine the outcome of your investments.
4. “My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
As we see and learn, the best for most investors is a low-cost index fund. Warren Buffet suggests that his money be separated with 90% in a low-cost index fund for his wife.
If the best investor in the world believes in low-cost index funds, then why do we as average people believe we can beat it.
Chasing the returns is a loser’s game, and chasing something you do not know will end you with being a loser at the end.
So financial literacy can really help.
Start with your financial literacy.
I started off with The Simple Path to Wealth by JL. Collins. He creates a simple path for all to create wealth.
If you are looking for further studies into the financial literature. I suggest my 7 Financial Books to change your life. This is a quick overview of some of the best books that will help you on your path.
The next step is creating a strategy to accomplish your goals.
Build Your Strategy and Stick to it:
It is time to build your own strategy. Strategies do change over time, but with a strategy and a goal in mind you will not have to be part of the in crowd chasing the returns. You can be the person sitting waiting patiently for opportunities.
My strategy is quite simple.
- My wife and I spend less than we make.
- We avoid debt.
- Invest the rest in low-cost index funds.
It is quite a simple strategy to focus on being frugal, staying out of credit card debt, and using all excess cash to invest in low-cost index funds.
Here is a look at our asset allocation to give you a better sense on how we allocate our money.
We keep our portfolio simple by using a lazy portfolio that can build us wealth.
Low-cost index funds/ETFs can really help you set-up a portfolio to really help you build wealth.
Invest Simply with M1 Finance. You can easily set up a portfolio with index funds and automate everything. Make life simpler.
Chasing Returns is a loser’s Game:
Everyone wants to be rich, but how hard will you work to become rich.
The FOMO crowd happens to be the people that see returns and performance of a certain stock, fund, or investment and sees that if you go high it is time to buy.
If we are only chasing returns we will more than likely lose money in the process.
In the true sense of trying to become wealthy, chasing returns is a losers game.
Buying high and selling low is not how to make money. You do not just go with how the wind blows or how the water flows. The reality is that the market goes up and down.
People fail to see that if the market drops 2%, they believe that the sky is falling. They will scream and shout and wonder why this could be. They will sell, and wait till the market goes back up. At that point, they will buy once again.
Just like in the Dot Com boom of 1999, people drove the market up to peak in March of 2000, and only for it to fall 50% by October of 2000.
Stocks fell, companies went bankrupt, and people were left with nothing. If you really want to know what happens to your stock when a company goes bankrupt, read Rinkydoofinance's article.
People lost money because they chased the highs of the market.
Stop Chasing the returns.
I hope you have learned something. Returns will always be an exciting point within the investment journey.
- Keep your emotions calm.
- Focus on your strategy.
- Dips and crashes happen
- Chasing the returns is a loser’s game. It never ends well.
So take it from me that it is time to make better decisions, educate yourself, and create a path that you can follow to create your own wealth and hit financial independence.
” Spend less than you make, stay out of debt, and invest the rest”
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I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.