One of the most frustrating things about investing can be FOMO — fear of missing out. Most new investors pick their positions by looking at the highest returns in previous periods and buying whatever did the best. Then they engage in an unfortunate game of leapfrog, getting drawn in by the next hot investment after it’s already gone up.
This outcome-oriented thinking not only produces poor returns; it’s also extremely discouraging. It’s the reason that after a setback, investors often start thinking about the markets as an unreliable casino and hang onto their cash, to their long-term detriment.
In a way, capital markets are a casino — but the rare one that is in your favor in the long run. Nobody can guess what will happen this month or year, but if history is any guide, it’s hard to be worse off in the markets as the years turn into decades and the growing earning power of thriving companies begins to manifest in your account.
It’s all about your mindset. Here are three simple statements that process-oriented — and successful — long-term investors tend to believe:
1. For any set of stocks or funds, just one will perform the best over any given period, and sometimes even the best one will go down.
2. Despite statement number 1, investors should stay invested and diversified through good markets and bad, even though much or all of their portfolio will miss that one best thing. They should not chase extreme performance no matter how tempting it may be.
3. Looking backward, investors shouldn’t regret number 2, even if they had a good guess about what would do best or if they see questionable choices of irresponsible investors rewarded with huge windfall profits.
While it’s difficult not to wish for a windfall, here are a few ideas that might help you avoid short-term regret once you’ve made the correct long-term choices:
1. Understand that the market outcome for a given period is just one of countless ways things could have turned out. A more conservative allocation might annoy you when everything is going up, but when things go wrong it can be a lifesaver. You never know, in advance, what will go wrong in the economy (COVID-19 anyone?).
2. To jump in and out of speculative bets successfully, you have to nail the timing perfectly, twice. You have to get in near the bottom and get back out at or near the top. Getting either decision right is hard. Getting both right is almost impossible. No matter what they say, your friends or people you read on the internet are not consistently successful at this in the long-term.
3. The kinds of investments that are likely to double or triple in a short time are also usually the kind that can go to zero very quickly. Believe it or not, if you can just average 20 percent returns a year, in the long run you will be one of the best investors in the world. There’s no reason to swing for the fences all the time.
4. Your investments are irreplaceable once you reach a certain career stage and age. A 20-year-old could lose their life savings on a speculative stock and make the money back in a matter of months. A 60-year-old looking at retirement would dramatically impair their lifestyle if they lost a big chunk of their nest egg. There’s just not enough time to accumulate money and get it working in the market to ever recover past a certain point.
Most new investors think the outcome is all that matters and compare their results to the hottest stocks and benchmarks to inevitable disappointment. A process-oriented investor can be confident they made good choices before even seeing the results. A process-oriented investing mindset can help you with the most important thing — staying in the race.
Have a question or topic you’d like to see covered in this column? Contact the author at ggard@telarrayadvisors.com. Gene Gard is Co-Chief-Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions.
