Some individuals go out of their way to be scared for Halloween. Managing money professionally, I regularly find enough monsters in the closet, regularly that so seeking out fresh fears seems unnecessary. One of the destructive challenges for investing when the market reaches high points is a psychological issue known as FOMO or the Fear of Missing Out. Older investors know the word capitulation, which is associated with a fear of a market drop. Capitulation can also be a fear of missing out on market growth. The tech wreck March of 2000 demonstrated how well-intentioned and strong-minded individuals can be blind to emotional persuasion.
FOMO is prevalent in the real estate market. Housing prices are increasing while mortgage interest rates continue to remain at historically low levels. The rising valuations have led millions of people to sell their homes for prices they could have never imagined. Another trend involves people taking the equity out of their homes through a cash-out refinance. Frequently they are accepting a larger mortgage with a low-interest rate, believing the equity is better served out of their home and into their investment accounts.
Another market that is getting more and more attention is cryptocurrency. On Halloween in 2020, one Bitcoin was worth a little less than $14,000. One year later, one Bitcoin has surpassed $60,000 in value. Bitcoin may be the “name-brand” for crypto, but many other coins and NFTs (Non-Fungible Tokens) have appeared on the blockchain marketplace. This rapid growth has grabbed the attention of investors, young and old alike. Even more conservative investors are starting to ask questions about the crypto market because they are watching their grandkids’ Dogecoin increase by 10x in a matter of weeks.
The Tortoise and the Hare analogy provides great wisdom and insight – you are much more likely to succeed if you stick to your long-term investment strategy and avoid the distractions of get-rich-quick opportunities. A long-term investment strategy is not exciting, but that does not mean it is stagnant.
When the fair market value increases rapidly, the way real estate and cryptocurrencies have over the past several months, there is an inevitable feeling of FOMO that settles into every investor’s brain. If left unchecked, decisions can be influenced by fear and greed rather than out of reason and prudence. The unbridled excitement surrounding dramatic price fluctuations does not necessarily imply it is foolish to partake in these markets but recognizes both the potential risks and the rewards. Ask yourself these questions if you are experiencing FOMO before making any investment: Were you already planning to sell your home, or are you trying to capitalize on a frothy real estate market? Were you already considering crypto as another way to diversify your portfolio, or are you hearing the news about 20-somethings becoming overnight millionaires? The answers to questions like these will help you pinpoint your “why .” Once you know your “why,” you will increase the probability of making decisions out of wisdom and not out of fear.
Joseph A. Clark is a Certified Financial Planner and Managing Partner of The Financial Enhancement Group, and an SEC Registered Investment Advisor. Contact Joe at yourlifeafterwork.com or 800-928-4001. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.