We know that fear of missing out (FOMO) can drive bad decisions and behaviors, but how does that translate to dollars and cents for investors? What’s the COMO (cost of missing out) on your investment portfolio? New studies answer that question, and the news is not good.
COMO at work
COMO – cost of missing out – is the financial impact of buy high, sell low. It’s the last thing you want to do, but still it’s a very common behavior during market volatility, caused by fear and misperception, with a side order of greed.
Most recently, the 2000 dot-com bust and the 2008 Great Recession scared many investors out of stocks, selling at the lows. The impact lingers to this day. Research by Frank Stafford of the University of Michigan Institute of Social Research indicates that the share of US families owning stocks has dropped from 30% in 2001 to less than 16% today. That’s a lot of missed prosperity: anyone who sold in the aftermath of September 11 and never returned to the market has missed a 106% price climb in the Dow Industrials, (and 177% total return with dividends).
COMO and wealth inequality – yours and theirs
It gets worse. A WSJ article on wealth disparity, a socially destructive and anti-democratic condition, cites a theoretical family who starts with $100k in stocks in 2007 and holds on through thick and thin and back to thick, giving them $130k today. They’re OK. But the other family sells in early 2009 at a 50 percent loss, puts all the money in a money market fund, and has the same $50k today. What a difference! For you, add another zero or two to that second theoretical family portfolio and you have personally, needlessly missed out on $millions you could have had.
Anecdotally, I’ve heard several stories, many apocryphal I believe, of investors who “sold everything” in anticipation of the 2008 crash, thereby avoiding huge temporary losses. True or not, these stories are only half-told. I have heard NO stories of prescient investors who “bought everything” in March 2009 so they could capture 100%+ gains.
Dramatic tales of buying or selling to avoid losses or capture gains are signs of COMO. By luck you may get half the trade right, but you won’t get the buy and sell right, you’ll just get COMO. For a personal COMO calculator see Vanguard’s study on the pitfalls of market timing.
We’d all agree that COMO should be vigilantly avoided. But how? It’s really quite simple. Use these behaviors, alone or, better yet, all at once:
- Invest long term
- Diversify – own many truly different things: stocks, bonds, alternative investments
- Set your investment goals and stick to them; rebalance ruthlessly
- Avoid the temptation to time markets and predict the investment future
- Ignore the 24/7 news cycle
- Use an investment professional who practices all of the above
Sounds easy, but it takes time, willingness and ability. We can help.
John Osbon – firstname.lastname@example.org