So many people feel they must keep a constant eye on their social media feeds that there’s a name for it: FoMO, or Fear of Missing Out. While reading a post about it by blogger Eric Barker, we were inspired to add FoMO-like tendencies to our “Stop Doing” list – as they apply to your investing.
In defining FoMO, Baker cites a Computers in Human Behavior study: “[A] pervasive apprehension that others might be having rewarding experiences from which one is absent, FoMO is characterized by the desire to stay continually connected with what others are doing.”
Social media forums like Facebook are breeding grounds for FoMO. Since your friends tend to feature big events while downplaying everyday annoyances, you’re left feeling that their life is more action-packed than yours. But you’re seeing their select achievements rather than their complete and usually far more mundane reality. You’re better off tending to your own interests instead of worrying about how they compare to those of your peers.
There are two similar tendencies in investing. Both are worth revisiting, as the Client Relationship Model-Phase 2 (CRM2) newly revised performance-reporting requirements could exacerbate them (as we address in this related Q&A).
Tracking-error regret occurs when your investments underperform seemingly appropriate “benchmark” comparisons. In theory, investors believe that comparing their returns to popular benchmarks helps them determine whether their investments are pulling their proper weight. In reality, and by design, if you’ve optimized a personalized portfolio to reflect your risk-and-return goals, it will often defy perfect comparison against “the norm” (if there even is such a thing).
Keeping Up With the Jones’
Second, and more directly related to FoMO, would be the temptation to keep up with the Jones’. Although the Jones’ could be your family, friends, co-workers … or basically anyone talking up their investment prowess in public..
Just like Facebook, social chitchat about investment performance isn’t reality; it is often carefully selected to highlight the winners. Just think about the last time you heard someone talk about his or her losing investments.
The reality is that there are some people out there who have had huge investment successes. But in my experience, (and there is evidence to back this up), the numbers are lower than suggested by random chance, especially after trading costs are factored in.
Put another way, if enough people are out there throwing darts at investments, some of them are bound to hit some winners. The issue is not whether some investors “score”; the issue is why there are so few of them.
So contrary to what you hear from your family, friends, co-workers, local stockbroker or the financial media … winners are few and far between. By tending to your own investment goals and ignoring the Jones’, you can increase your odds that you’re not missing out on a thing.