How to be a conservative investor at the top of the stock market

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How to tame your inner FOMO

Stocks and ETFs have ticker symbols. These are usually 3 or 4 letters, and this system has been used to identify and trade since the days of magnetic tape.

One ticker that is not currently in use is this: FOMO. It has recently become a popular phrase for investors, even though it is not the ticker symbol for a company’s stock or an ETF.

FOMO is the fear of missing out… on the gigantic gains that “everyone” seems to be making on the stock market. Rest assured, FOMO is real. However, many of the hypotheses leading to FOMO are more of an illusion than reality.

If you are a conservative-minded investor, perhaps retired or nearing retirement, you need to find a balance. This balance is all about staying grounded in your preservation-first investment mantra and feeling like you’re getting your “fair share” of market appreciation. How do you do this?

First, a reality check

Much of the stock market has do not been a godsend this year. I have written about this from many angles over the past few years, so feel free to look back and refer to these articles.

What I’ll just add is this: With 6 weeks left in the year, more than half of the stocks in the Dow Jones Industrial Average (16 out of 30) are down for 2020. Small-cap, value stocks and non-Americans are only recently to have some air under them It was a very tight market.

However, this is masked in “mainstream” stock indexes, like the S&P 500. It has been for most of the past 3 years. Historically, this is when equity investors are most vulnerable. It follows that this is when FOMO is at its highest. This is where we seem to be right now.

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I wasn’t going to include a chart in this article, as I usually do. Then I thought about it and realized that it summed up this point about 2020 very simply and clearly.

Above you see 3 ETFs mapped for 2020, through October 31st. The blue line is the Nasdaq
NDAQ
, dominated by half a dozen Mega-Cap stocks, most of which do not pay dividends. Big companies, but at an absurd price at this point, as I see it. Hunt, but know what you are buying, in terms of valuation.

The orange line represents the 50 largest companies in the S&P 500. This group gained nearly 10% in the first 10 months of the year. It’s basically these big names Nasdaq, and a relatively small group of others.

The world according to me

I say this because of the purple line that slides the back of the chart. This is the MSCI World Index, which includes more than 2,000 companies. It is stable for the year, even if it includes the stocks of the first two groups above the chart.

Summary: Most of the world’s stock markets have been flat or declining this year. What worked in the recent past (2018-2019) has worked again this year, albeit with a huge pandemic drop along the way. It’s the past.

The future could very well be the rest of the world in the evening a little the score. But even if it hasn’t happened anytime soon, you need to stop your FOMO from controlling your investing emotions. After all, it’s not a game, it’s a process. And buy what happened, because it has increased, is a risky strategy. It works for traders, but not generally for investors.

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Why are you investing? Are you sure?

This is when it helps to remember what you are investing for. It’s not a race, it’s a lifestyle financial support system. And, if you are already using your wallet for this purpose, or if you are getting closer to when you will, you need to separate two things. Specifically, what you need in your wallet now and what you will need later.

I keep an internal rating system for ETFs and stocks that I follow (it won’t be internal any longer, but that’s another story for another day). This scoring system starts with a very simple assumption: any investment can increase its price at any time. What distinguishes investments and different market conditions is the amount of risk if a major loss is associated with that upside potential.

Fight FOMO

This is where the FOMO comes in. I’m not a professional psychologist, but after over 30 years of doing this, I’m at least an investor psychologist, of sorts. And this is when people tend to want to own what they would have liked to have in the recent past. Better to take into account the current environment, without being obsessed with retrospective analysis of what just worked. In short, do not continue, invest.

2020: the year long

Here’s another way to think about it. Each year the stock market can go a number of different ways. But of course, we don’t know which direction this will go in advance. The way things turned out in 2020, with the stock market rising, given everything that has happened, was one of those possibilities.

But was it the “obvious” one? I doubt. 2020 has been a year of investing that is better characterized by what some aggressive investors have ‘managed to do’ rather than what we would expect if, by some horrible twist of fate, we had 10 years like this. .

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So 2020 was probably a low probability outcome. Just as a horse wins a race with odds of 20-1, and you say to yourself, “I should have bet on that horse,” we also need to keep our perspective when years like this one. produce.

Investment prospects

When we do this we see a bunch of pros and cons that add up, as always, to the potential for return. However, I think the potential for return comes with many risks of major losses. Does that mean you are hiding in cash? Not really. But that does mean you take into account how much risk the traditional stock market is taking.

That’s why I favor a 3-part approach to portfolio construction. A core equity portfolio, for long-term growth potential and to keep FOMO at bay. This, together with a hedge, protects against a major downside risk. And, a tactical piece, which addresses the up-and-coming nature of modern investment markets.

In other words, if you agree with me that investing in buy and hold is a losing proposition for the next decade, it helps to have a dedicated part of your portfolio that can capture short-term profit potential wherever it appears.

Conservative investors

Remember that I am talking about the “conservative” investor here. If you are an investment speculator or someone who doesn’t feel the need to be educated on a defense-focused investing mindset, then nothing you just read is so relevant to you. . But thanks for reading, anyway!

Comments provided are provided for informational purposes only, and not individual investment advice or recommendations. Sungarden provides advisory services through Dynamic Wealth Advisors.

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