Focus on outcomes and investment process, not shiny bright objects
What the FOMO is going on? Fear of Missing Out (FOMO) has moved into the investor psyche. And, it has become the thing that wouldn’t leave.
This has prompted investors of many many varieties to ask their financial advisors and themselves the type of questions that don’t often come up. Whether it’s an 80-year old retiree, a 48-year old business executive, or a 20-year old college student, it seems that hunting for “rocket” investments is the new national pastime. And, when the proverbial national pastime, baseball, returns in a few weeks, I do not expect aggressive investing fever to break.
Whether it’s Bitcoin, high-flying meme stocks, SPACs or other headline-grabbing investment genres, there seems to be an insatiable desire to own them. Or, for newer investors, to figure out if they should own them.
I will not bore you with the concerns we investment strategists have when investment sentiment gets this frothy. I and many other commentators have said plenty about this in the buildup to this phase of the investment market cycle.
While you may assume that “being more aggressive” is what you want out of your investment portfolio, that’s not really what you want. What you really want is to find something that will go up in price at a faster rate than your “normal” buy-and-hold or otherwise traditional market-based portfolio. That’s understandable, when it seems your neighbors and friends are all getting rich.
However, when we break this down, it turns out that the way to reach your desired end does not justify the means many are taking to get there. They are making a mistaken, but very dangerous assumption.
That is, they think that the way to earn higher rates of return is to accept more risk. That is what we were all taught years ago, as part of Investing 101. However, that is wrong. And in today’s market climate, not realizing that can be a 4-7 figure dollar error, depending on how large your portfolio is.
Investing in volatile assets does get you something. It gets you...a volatile asset! That puts a much greater burden on you or your investment manager. At a time when even the S&P 500 is moving at 2-3 times the speed, up and down, as it did in years past, the more you go out the “aggressive” curve, the greater risk you take of skewing your returns the wrong way.
In other words, investing in things that are volatile, and which have appreciated greatly in the past few years, is a recipe for disaster. It is the 2021 version of the Greater Fool Theory. That’s when you buy something and rely on someone(anyone!) taking it off your hands at a higher price than you bought it for.
When this goes wrong, it ends up like the Nasdaq 100 Index (QQQ), which peaked in March of 2000, and did not return to that level until...wait for it...December of2016! With that type of scenario in mind, how do you try to take advantage of today’s investment climate, without making judgements about your risk tolerance that you are bound to regret later on?
Consider “tactical” investing with a “contrarian” bent
I suggest investors and financial advisors devote less time to buying what is “obvious” according to headlines and family members. Instead, learn to develop a tactical process that recognizes that higher volatility exists everywhere in today’s markets.
In other words, don’t increase the volatility of the investments you use. Increase the frequency with which you rotate through a set of investments. And, establish some risk-management rules.
This is aversion of the old investment saying, “cut your losers, and let your winners run. The difference here is that in most cases, even the winners won’t be allowed to run for years. The current market environment is such that trying to buy and hold throughout your entire portfolio is courting much higher risk of major loss than at any point since 2008, or perhaps earlier.
One of the big stories of 2021 so far has been the revival of stocks and sectors that have been serial underperformers since the financial crisis over a decade ago. Energy stocks, financial companies and others that pay above-average but financially-stable dividends have gone from laggards to leaders.
In many cases, this occurred without the drama of 10-20% daily price swings. No one really wants to run to the kitchen to grab a sandwich, come back to their desk and find out that one of their holdings has fallen by a big dollar amount.
Here are the basics of tactical investing with a contrarian mindset:
- Train yourself to methodically follow a repeatable routine to identify investments that are down but not out (”contrarian” investing)
- Add a level of discipline and consistency to what you are willing to own
- Enter investment positions, while simultaneously establishing strict risk-management parameters
- Act with conviction and without emotion, staying only as long as your investment process suggests.
In today’s markets, that may involve holding periods of weeks or months, where you used to hold for years. That’s the “tactical” part of this. This should promote greater peace-of-mind, and less temptation for FOMO. It should also result in better treatment of your hard-earned wealth.
Related: How to Rein in Stock-Picking Clients