By: Sheila Morgan
Ever since the New York Stock Exchange started trading in 1792, market timing continues to be a very arduous and volatile way to achieve stable returns on an ongoing basis, depending on the news catalyst of the day. This unpredictable way of investing in the market often leads investors to heightened emotions of greed and fear.
As the markets reach unprecedented heights, there’s a fear of missing out (FOMO) on further upside potential in the market, which can become an all-consuming obsession. On the other side of the coin, there is also the fear of losing it all (FOLIA) at market highs, which suggests investors can be overly conservative out of fear of a major market correction. As we navigate the ebbs and flows of market cycles and volatility, we are always weighing the potential rewards against the looming risks of FOMO and FOLIA.
Undoubtedly, the Artificial intelligence mania has been driving the markets. If you’re not an AI beneficiary, you’re probably wondering: Where’s the party? Interestingly, I’ve heard from some of our clients recently who have observed that the markets have risen significantly, yet account performance may be more muted by comparison. To shed some light on this, I wanted to share my observations that may help explain what I believe is transpiring.
In 2023, market highs were driven by a few very large companies. Consequently, this meant there was less depth to the markets, and this impacted the performance of clients with properly diversified portfolios. Historically, owning many asset classes has helped smooth performance and provided stability during volatile markets. The inherent benefit of owning a diversified portfolio is that they can better withstand market turbulence.
The debate over the interest rate policy is what caused most of 2023 to tread sideways, only to jump dramatically in the fourth quarter as the market bet on quicker and more frequent rate reductions positively impacting the markets. Market performance in 2024 is being heavily influenced by projected interest rate conditions and the imminent election in November. Trying to predict the Fed’s next decision on interest rates will lead to more uncertainty.
Watching a stock’s rapid increase in price relative to the broader markets can trigger emotions like regret, fear of missing out (FOMO), or anxiety, but it’s equally important to remember that owning growth stocks like Nvidia can be exciting yet also deliver gut-wrenching volatility. I feel like markets have forgotten that many speculative stocks fell 50% in 2022. Past examples include meme stocks, the 2000 – 2002 internet stocks, the 2007 bubble, and the 2020-2021 COVID stay-at home stocks that investors chased out of FOMO, only to see them surreptitiously crash.
Attempting to time the market is futile and could be a costly error. Active trading can result in unnecessary transactions and opportunity costs. Transferring funds in and out of cash may trigger front-and back-loaded fees for certain mutual funds, commission costs for stocks, as well as capital gains taxes, all likely resulting in lower returns.
No one can predict the optimal time to invest. Although history can’t tell you when these periods will occur, it does demonstrate that financial markets ultimately recover from even the most turbulent times. Investors who try to time the market aim to outperform by looking for the lowest or highest point in the market cycle. On the other hand, those who spend “time in the market” are focused on the fundamentals of the investment and hold it for the longer term. The capacity to withstand short-term fluctuations and remain invested for the longer term tends to generate positive returns over time. By attempting to time the market, you run the risk of missing out on some of the best performing days. While market timing can be alluring, it is seldom successful.
FOMO emotion is based on what has happened, not what may happen. In my view, it’s an unhappy way to invest if you’re kicking yourself for not buying the hottest stock instead of being grateful for owning a diversified selection of many companies, thereby potentially avoiding a lot of anguish from chasing hunches and headlines. The key to a well-positioned portfolio that can withstand the ebbs and flows of market volatility is diversification. Diversification means owning lots of different asset classes to benefit from different types of companies, industries, and geographic regions. This can help to smooth performance and reduce volatility. Regardless of market trends and prevailing conditions, we believe the best client outcomes come from being patient, having a longer-term time horizon, having a plan and sticking to the plan, of course, and never allowing emotions to impact your investing.
If you have any questions about portfolio advice and management, give us a call or email us at info@portfolioadvisor.com.
