On Top of the Radar
I believe everybody is guilty of #FOMO. Fear of missing good things and good times is part of being human, nevertheless the ensuing feeling of being on the sidelines, left behind or miss a good run of the market not only sucks, but will also hurt your bottom line and will push you to take unnecessary risks in order to catch up with your peers and/or benchmarks. Since I’ve played lots of sports growing up and still enjoy a good social life, #FOMO is not strange to me. Said that, one of my roles as a professional investment manager is to recognize the emotional and cognitive biases that plague most of us and don’t let it hurt my investment strategies or my clients.
I’m also a believer in the Efficient Market Hypothesis (EMH), but not in its strongest form. In other words, I don’t believe market are constantly fully efficient. Some people may insist that it’s useless to try to do better than the market, since all information (that worth something) is constantly and immediately incorporated in the observable market price. However, if this was 100% true, a simple paradox called the Grossman-Stiglitz Paradox would exist…
“If freely obtainable market prices reflected an asset intrinsic value, then a rational investor would not incur the cost of obtaining and analyzing information to obtain a second estimate of the asset’s value. If no investor obtains and analyzes information about an asset, however, then how can the market price reflect the asset’s intrinsic value?” The rational efficient markets formulation (Grossman and Stiglitz, 1980).
As such, I’m certain that a disciplined and repeatable process to make investment decisions (asset allocation + investment selection) is key to increase one’s chance of obtaining superior risk adjusted returns over a full investment cycle. But first, it’s important to control our fear of missing out, since there is a chance that we’ll make suboptimal decisions.
There are few ways to mitigate #FOMO. The most obvious are education regarding market and economic cycles, dollar cost average, and as you can see in the chart below, accept the importance of focusing on Time in the Market instead of timing the market.
I like to say that “investing is simple, but not easy”. It’s simple to accept the fact that time is on our side, but it’s harder to know consistently when to jump in or out of the markets. To support that claim, during the last 39 years we have identified the top 50 days and the bottom 50 days of the market (S&P500 index was used in the exercise).
As you can see in the top chart, if you stayed fully invested during the entire 14,235 days in the entire period, your average annualized total return (ANLZD TTR) would have been approximately 12.4%. Now, if you missed the top 50 days in that same period, your ANLZD TTR would drop dramatically to only 2.8%. Next, we took a step further and identified the bottom 50 days in the entire period and if you were lucky or extremely talented to miss the 50 biggest down days, your ANLZD TTR would more than double to approximately 25.1% (bottom left chart). Finally, if you missed both, the top and bottom days, your ANLZD TTR would have been approximately the same as if you stayed fully invested during the entire period.
As I suggested above, it’s indeed simple to accept the fact that time is on our side, but it’s much harder to know exactly when we want things or when we will need things. For that you have advisers at our Investment Solutions Group that can help you navigate your #FOMO by helping you plan accordingly and hold your hands throughout your investment journey.
One of my jobs as a Global Investment Strategist is not necessarily to jump in or out of any market, but to identify periods where emotional decision making is maybe taking a hold of the markets, and position our Brazen Series of strategies by overweighting and underweighting different asset classes and investment choices to benefit from the irrationality of market participants.