Fear Of Missing Out While Investing Could Be Dangerous
Last weekend, I had a chance to talk to my uncle. He is few years away from retirement age and has a paid-off house, a stable job, savings, and not many liabilities.
While chatting, my uncle asked me, “Where should we invest next?” He has been very risk-averse, choosing to mainly own blue-chip dividend-paying stocks in his self-managed retirement accounts. He added, “Over the past few years, we have done well. But, should we be taking on more risk to earn even higher returns?”
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Dear reader, my goal here is not to tell you about how my uncle is doing, but to provide you with some investing insights. Chances are, you have also had similar conversations with your friends or family.
You see, my uncle, like many others, could be suffering from a phenomenon now commonly referred to as the “fear of missing out,” or “FOMO.” This happens when investors want to own the asset that’s currently skyrocketing so they don’t miss out on gains.
I thought I’d take some time away from writing about my usual topics and talk about few questions and investment management rules that are not discussed much in the mainstream media. They are very important these days. Mind you, these are the exact things I talked about with my uncle.
5 Things to Know While Investing
- If something has gone up significantly in value, almost vertically, is it worth buying? Take Bitcoin, for example. My uncle insisted, “My friends say Bitcoin is a great investment.” Since the beginning of 2017, the cryptocurrency has increased by close to 700%. It now trades at $7,400. Could it still go up another 700% in a similar time frame going forward? For that to happen, Bitcoin prices would have to go to $51,000 in the next 11 months, which would be an amazing feat.
- The greatest opportunities are born in the times of the most uncertainty, not when the good times are rolling. The year 2009, for example, was the greatest buying opportunity. At that time, valuations were extremely low, uncertainty was severe, and no one wanted to own stocks.
- Complacency never ends well. Usually, as markets move higher, investors start to think that prices will continue to go up. The U.S. housing market crash was a great example of this. Everyone you talked to at the time was very confident that home prices would never go down. Investors were buying homes left, right, and center—without paying any attention to the overall economic conditions. They became too complacent. What followed? A rigorous crash.
- Never ignore data. It tells you the real picture, blocking out the noise that you hear elsewhere. By knowing what the data says, investors can get ahead of the curve. If you look back at previous manias and crashes, you will see that those who paid attention to the data were able to profit big-time (or at the very least, secure the wealth that they already had).
- Capital preservation is never a bad idea. It is simply the strategy of trying not to lose what you have accumulated. One way to preserve capital is by having stop losses in place at all times. They are free, and they protect investors from suffering losses and giving away profits. Another tactic would be to take some profits on positions that have increased immensely in value.
