Investing on facts not FOMO
Written on the 13 January 2022 by Arrow
Prices for property, cryptocurrencies and shares have all hit records recently. While great news for investors, there’s always a risk that some people will jump into the market because they are afraid of missing out on easy money.
A long historyThis fear of missing out goes back even further to the mid-1600s Dutch tulip market bubble. At its height, the cost of the rarest tulip bulb was the equivalent of six times the average wage. People rushed to buy tulips on credit for fear of missing out. Inevitably, the tulip bubble burst, devastating investors and the Dutch economy.
A much more recent example of a market getting overheated was the dotcom boom at the turn of the century when people paid top dollar for shares in companies with no history of profits.
Two decades later, and there are concerns that FOMO may be a factor in the rise of property, shares and cryptocurrencies. Over the past year, Australian house prices have jumped 22 per cent on average and more in some parts of the country.i People are scared that if they don’t get in now, then they will never get a foot on the property ladder.
Global share price to earnings (PE) ratios are also at high levels. Some argue that high prices are justified by low interest rates while others worry that some companies may be valued on an overly optimistic view of future earnings.ii
Cryptocurrencies are complexBut it’s the focus on cryptocurrencies that has some market veterans concerned, not least because these are complex new instruments that are not well understood.
At the end of the day, you should always understand where you are putting your money and how it fits your investment objectives and risk profile. If a big drop in price would keep you awake at night, then crypto may not be for you.
In its typically understated style, the Reserve Bank has warned that “the current speculative demand for cryptocurrencies and their surge in value is likely to reverse”.iii
Meme stocks are also an area of concern. These are companies made popular with retail investors through social media sites like Reddit. Examples include AMC and Gamestop.
They are what used to be called pump-and-dump stocks, popularised in the movie The Wolf of Wall St. The only investors to really benefit are those who got in at the beginning and sold in time to realise their gains; not the ones who bought at the peak of the frenzy.
Think long termInvestments should always reflect your long-term objectives. Jumping from one investment to another just because somebody says it’s a good thing can be dangerous.
In the words of Warren Buffett, it pays to be counterintuitive with the market. Rather than follow the crowd “be fearful when others are greedy and greedy when others are fearful”.
But humans being human, tend to do the opposite and pay the price. It’s an age-old maxim that in the long run, growth assets like shares and property tend to outperform other asset classes. You won’t enjoy those long-term gains if you are buying and selling in reaction to short-term market moves.
That’s not to say you should set and forget your investments. For instance, when the market is booming, it may present an opportunity to realise some of your gains, sell any duds, and reinvest the proceeds when bargains emerge.
If you are considering an investment but unsure about its worth or where it might sit within your overall portfolio, give us a call.