Fear of missing out, or ‘FOMO’ as the Instagram generation abbreviates it, is not only an affliction of social media addicts – it’s long been a problem for investors.
For the non-expert investor, it occurs when financial indicators are pointing sharply up, as they were last week.
This can tempt the FOMO-suffer to leap back into risk asset classes so as not to miss out on all that lovely ‘upside’.
Risk assets, such as shares and property, typically offer higher returns over the long term than virtually risk-free assets such as government bonds or term deposits. The catch is that some, or occasionally all, of your capital can be lost.
The FOMO-investor’s urge to leap into the market right now is a similar emotion to the one that drives them to sell the same assets when they’re falling in value – the fear then is of missing out on the last chance to sell at a decent price.
In both cases, the FOMO-driven investment style is unlikely to make you richer in the long term.
More sober investment styles – the kind you get from an honest financial adviser or through well-managed super funds – buy and sell when ‘nothing’s happening’.
That is, they are constantly adjusting their risk profiles based on long-term indicators, not based on a few feel-good (or feel-bad) indicators.
Sentiment vs fundamentals
Last week provided a good illustration of how far market sentiment can diverge from analysis of economic fundamentals.
In the nine trading days up until last Thursday, the ASX 200 index of shares surged a dramatic 6.6 per cent, pulling back slightly on Friday to end the fortnight up 6.2 per cent overall.
Is that a buy signal? Well you might think so, seeing as the iron ore price – one of Australia’s key economic indicators in recent years – was also leaping higher.
It put on nearly 20 per cent in four trading sessions to end the week above $US70 a tonne, making December’s low of $38 a tonne seem like a distant memory.
Global oil prices did something similar, rising 16 per cent since the start of April.
Oh, and the Aussie dollar shook off gloomy forecasts to spend three days above 78 US cents before pulling back to 77 cents.
To the untrained eye, the good times are returning. It must be time to leap back into the market, as surely as the long Indian summer makes it a good time for one last pool party.
The sober view
While all this was happening, the fun-police were meeting at the Melbourne Economic Forum. And they didn’t bring their bathers.
Professor Ross Garnaut, whose predictions of the post-mining-boom slowdown have proved to be drearily accurate, presented a list of structural factors that make a risk-asset binge look unhealthy.
Australia’s stock market is heavily skewed towards big banks and big miners, and judging by the Professor’s forecasts the surge in their prices last week will not hold.
He sketched out a nation lulled into a false sense of optimism by rosy forecasts from Canberra – forecasts that have reliably missed their mark for years.
In the paper presented at the Melbourne conference, he writes: “The [federal budget] forward estimates embody unrealistically high expectations on nominal GDP growth … overestimating both inflation … and real output growth.
“[They] assume a return to historical total factor productivity growth when there has been none for a decade …
“The fall in business investment from the end of the resources boom has a long way to go. Growth recently has largely come from resource export volumes, housing, consumption and fiscal expansion.
“Growth in export volumes has been associated with lower export prices and total resource export revenues – Australian incomes would be higher if we had less of this particular growth.
“And growth in housing investment and private consumption are unsustainable – both will be under pressure in the period ahead.”
The kitchen table investor
Gawd. What a list. But what does it mean for the average household?
Most households in middle Australia do not actively manage a portfolio of investments. If they do, it tends to be a smaller investment than their two biggest assets – their home and superannuation.
That said, super funds offer switching between portfolios – with ‘growth’, ‘balanced’ and ‘cash’ representing the basic risk profiles, but often supplemented with more nuanced options.
So super savers can feel the pull of ‘FOMO’ and may switch between these options at the wrong times. That’s where financial advice, or at least a very broad reading of economic and financial trends, needs to be placed above the emotional fear of missing out.
In the long run, missing out on dramatic losses is just as important as the upside you never captured.