Don’t Let FOMO Cloud Your Logic or Endanger Your Goals
Generally, 2024 was a great one for the stock market. All the major indexes ended the year with significant gains. The S&P 500 was up by 23.3%, while the Nasdaq grew by 28.6% and the Dow by 13%.1 That’s great, but, of course, most of you are investing for income first, which means you’re primarily invested in bonds and bond-like instruments. But the news there is good, too! Our most conservative portfolios finished the year up by about 7% on average, depending on your individual holdings. That’s just slightly higher than our target goal of about 6%.
Now, the temptation to compare your 7% with Wall Street’s 23% is natural and understandable, but before you do, it’s important to remember the potential dangers of FOMO: fear of missing out. We probably all remember that urge we had as teenagers to go out every Friday or Saturday night just because we were afraid we might miss The Big Thing that everyone would be talking about at school on Monday. Of course, most of the time, no Big Thing happened, and we ended up feeling a little foolish. That’s FOMO in action.
Although FOMO typically goes away as we get older when it comes to our social life, it often doesn’t go away when it comes to investing. Even when you’ve had a good year and achieved all your goals, if a friend or acquaintance appears to have done even better, FOMO can start to set in. So, it’s important to recognize this and remember that FOMO is an emotional response and that you need to step back and assess the situation logically.
Know When to Fold ’Em
Think about playing any game in a casino. When is the best time to cash out and step away: when you’re up or when you’re down? When you’re up is the logical answer. But emotionally, it’s difficult for most people to step away from either situation. When you’re down, you want to keep playing in hopes of recovering your losses. When you’re up, you want to win more.
I talked about this very thing in my book “Return on Principle,” and shared a story to illustrate it. My mom had never played blackjack and wanted me to teach her. I said okay, but I asked her to set a goal first. She said winning $500 would make her happy. I coached her through a game, and she did very well. When she got to a point where she had won $515, I told the dealer immediately, “We’re out.” My mom was stunned and said, “Are you crazy? I’m winning!”
Naturally, that was her reaction. Nobody wants to quit when they’re winning. It’s hard even if you’ve already achieved or surpassed a goal. You can’t help thinking, “If I step away, someone else is going to win all that additional money that could have been mine!” That’s FOMO.
But if you should feel a twinge of FOMO creeping in about your 2024 financial performance compared to Wall Street’s, just remember this: the single most important thing to do when it comes to investing is to make sure your investment strategy aligns with your goals. You already know this, of course, and it’s the reason you’re investing with us. When you set your goals, you realized they were income-based. Being either retired or close to retirement, you recognized that you needed to start making the transition from being focused on total return — regardless of whether it came from capital gains or interest and dividends — to being focused on interest and dividends first, growth second. Why? Because that’s the money the market can’t take back. That’s the money you can spend to achieve your goals and meet your needs. And whether you are spending it or reinvesting it to grow your portfolio organically, with less risk, it’s the money that matters most when you’re retired or transitioning toward retirement. Always remember my rental property analogy: the value of your property might go up or down, but your rental income will stay consistent either way. It’s a renewable resource.
So, again, with regard to FOMO, keep in mind that the S&P 500’s 23% return is all growth-based. You can brag about it, but you can’t spend it, and you could just as easily lose it on the next roll of the dice, meaning the next turn of the market.
A Huge Unknown
Now, does all this mean that all income-first investors need to simply stay the course and not even consider making changes to their strategy as the new year begins? Of course not. As always, if your strategy is generating enough income but you want to increase your market exposure to potentially increase your growth, and you have the right risk tolerance, we’re happy to meet with you to discuss that. The danger of FOMO doesn’t really apply to that situation. Rather, it applies to those who might suddenly think it’s safe now to go back to a growth-first strategy designed to engineer income by selling stock shares every year. At the end of the day, that is still an approach dependent on a huge unknown. It’s a strategy based on crossing your fingers and toes and hoping the market continues going up year after year. It might go up, but it might go down instead, and in those years when it’s down you’ll end up selling more shares for less money. You’ll end up “reverse dollar-cost-averaging” in other words, which can quickly cannibalize your principal and, ultimately, increase your risk of outliving your money.
So, once again, that’s the real danger of FOMO. And if you want to talk about possibly increasing your market exposure a bit more and you have the right risk tolerance for it, that’s fine, just so long as you remain confident your strategy is still generating enough interest and dividends to satisfy your income needs and goals.
Now, one last thing I want to mention is that, although we surpassed our target goal for the year, our portfolios of bonds and bond-like instruments did go down slightly in value on average in December due to rising interest rates. Although the Federal Reserve lowered short-term interest rates three times last year, long-term rates have crept up. In fact, the interest rate on the 10-year government bond ended last year near 4.6%, its highest level in over 15 years.2 The main reason for this probably has to do with nervousness about what might happen with market growth and inflation when the new presidential administration takes over this year. While more growth would be welcome, the return of high inflation certainly wouldn’t. Naturally, we’ll be keeping an eye on all of that, and managing your accounts accordingly.
As always, if you have any questions, call our office at any time. Happy New Year!
1 “Market News: Dec. 31, 2024,” Investopedia.com, Dec. 31, 2024
2 Marketwatch.com
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm.