We all know the world of investing has its ups and downs. For several decades now, GAAM has educated clients on the dangers of emotional investing. When an investor lets their emotions control their investing decisions, it becomes a recipe for disaster.
Let me give you an example: Think of a classic car auction. Let’s say I have always wanted to own a 1955 Chevy. Years ago I couldn’t afford one, but now I have the ability to buy a moderately priced car. I see an advertisement for a local auction which is going to have three 1955 Chevys for sale. So, I go inspect the cars and do some research on their value. I know the condition and market value of each car and have therefore set a price I would be willing to pay for each one. Then, comes the day of the auction.
I wake early and eagerly prepare for the day. I collect my research notes and off I go. There are a lot of people in attendance and a lot of cars being auctioned. The first 1955 Chevy is auction car number 43. The bid starts, and I jump in with a $12,000 bid. The bid continues to climb at a fast pace, and I can feel my nerves multiply like butterflies in my stomach. Next, I bid $25,000, but the bidding does not stop. I look at my notes. This car’s value is $32,000, and the bid is now at $31,000. I decide this is too high, so I stop bidding and watch until the hammer drops at $38,500. By now, I am sweating. WOW, those people really over bid. Great car but too much money, I think to myself.
The second ‘55 comes up. I jump in early as this car needs a bit of work and only has a value of $21,000. The bidding slows this time at $18,000, and I am excited. This is my car, and I am going to take it home. But, a new bidder jumps in at $18,500. Hey, that is my car, I think to myself and instantly raise the bid to $19,000. The new bidder then increases her bid to $20,000. No way, I think, I am taking this car home. The new bidder jumps again, $21,500 she says. OK, I am done playing around. I’ll show her whose car this is. A bead of sweat runs down my forehead and into my eye as I say $23,000. The back and forth continues until I end up paying $25,500 for the 1955 Chevy. Finally, it hits me: The value I placed on this car was $21,000. I wanted to pay less than that. What happened?
I let my emotions get the best of me. Has this ever happened to you?
When we experience long bull markets, investors get what we refer to as FOMO or the Fear of Missing Out. Otherwise conservative investors who have a plan and are committed to following through on that plan start to wonder what they are missing out on. They hear radio ads about index funds that are tracking with the market. Their emotions begin to run high, and they question their current plan. Maybe I will take on some additional risk for a short time, they say.
This behavior is dangerous for investors. What typically happens with those investors is they fall into the very trap we have been educating them about for years. They start following the crowd of people getting into index funds* or some other investment which will offer increased growth potential. What they fail to realize in that moment is they also take on 100% of the risk. If the index drop 60%, so will they. Do you know how long it takes to recover a 60% decline? Years potentially. If you have to take income during that time, it makes matters even worse.
Those investors have bought in at the worst time, when markets are hitting new highs. Those same investors will also make another mistake when the markets fall. They will watch their investments shrink, and then, right when the markets approach all-time lows, they will sell and lock-in their losses. This is a documented phenomenon**.
GAAM goes to great lengths to remind our clients about the dangers of emotional investing. We work with you to build a plan that has a high-probability of success in the long term, and we remain focused on that plan. Our advisors are trained to spot FOMOitis. By keeping your emotions in check, the only thing you are missing out on is the downturn. Remember what GAAM Investment Consultant Don Hagan has said about index funds: “Index funds carry 100% risk, 100% of the time.” Should you develop FOMOitis, go see your GAAM advisor. They have the cure!
*Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing