Every day we're bombarded with reports of what's hot and what's not--fueling a fear of missing out (FOMO) on some great investment opportunity. But a diversified portfolio is still the best way for you to maximize returns while minimizing risk.
The anxiety that we feel when we believe something better is happening elsewhere isn't unique to investing. Fear of missing out is a phenomenon that affects many aspects of our daily lives, and it's far more prevalent than you may think. Indeed, FOMO was added to the Oxford English Online Dictionary in 2013, along with such other contemporary expressions as selfie and twerk.
The emergence of social media has only compounded the FOMO effect. I can honestly say that I have absolutely zero interest in horse racing. Frankly, I dislike the sport. But with all the hype on Facebook and Twitter, I couldn't help but watch the Belmont Stakes in June out of fear of missing American Pharaoh become the first Triple Crown winner of my lifetime. Who could not watch that spectacle?
How FOMO affects the way you think about your investments is more worrisome. Over the years, you likely showed up at countless barbecues only to hear some neighbor bragging how his portfolio outperformed the Standard & Poor's 500 stock index over the last six months. Almost immediately, you were probably dissatisfied with your portfolio and wondered why it wasn't achieving the same results.
You're just as upset with your diversified strategy when every media outlet is constantly reminding you about the stellar performance of some particular stock or sector. There's a huge temptation to change course and invest in the latest hot streak. Fueling the urge is so-called recency bias , a belief that recent financial trends will continue.
But changing your portfolio to take advantage of a run that has already taken place is foolish. Think about it: You would be selling assets that may be undervalued relative to the market in order to buy assets that have scored huge gains and are likely more expensive.
Moreover, history is littered with examples of hot trends gone cold. In the late 1990s, many investors wanted to abandon their diversified portfolios and buy booming technology stocks . In the mid-2000s, it seemed everyone wanted to borrow money to flip real estate . A few years later, investors were worried about a double-dip recession and wondered if they should sell their stocks and buy gold instead.
In each case, FOMO caused investors to be more afraid of missing a bull market than suffering large losses. In hindsight, changing your long-term investment strategy would have been a drastic mistake.
When everyone from those in media to your own acquaintances tells you to place heavy bets on one or more investment categories that have recently done well, don't be fooled by FOMO. You could lose big. That's why a diversified portfolio strategy is still the best chance to achieve long-term investment success.
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Lon Jefferies, CFP, MBA, is an investment advisor with the fee-only financial planning firmNet Worth Advisory Groupin Sandy, Utah. You can find Lon onTwitter,LinkedInandGoogle+. Contact him at (801) 566-0740 firstname.lastname@example.org.
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