I recently received an email from a reader I’ll call Andrew. He’s 25 and has been using the Couch Potato strategy for two years now. He’s happy with the results, but starting to feel restless.
“A few of my coworkers have introduced me to day trading,” he wrote. “They focus on volatile ETFs that hold gold miners, as well as oil and gas companies. These funds swing up and down all day, and my coworkers claim that with some research they’re able to make big returns. This leaves me feeling like I’m missing out on significant returns for taking a little more risk.”
Andrew is experiencing what’s come to be known as fear of missing out, or FOMO, a pervasive feeling that other people are enjoying something we’re not. We all have a little FOMO from time to time, like when we’re invited to a party we can’t attend, or when friends talk about their upcoming vacation to Maui just after we put a few thousand bucks in our RRSP. For index investors, a major FOMO trigger can be tales of outsized returns from people who actively trade stocks.
I feel for Andrew. I can just hear the chatter around his office: one colleague bought ABC at the opening bell and then flipped it for a 12% profit when its earnings announcement was better than expected (he anticipated this, of course, because of his shrewd research). Another sold XYZ for a tidy profit just before it lost a patent case (a brilliant call) and its stock went into the toilet. High-fives all around for that one. Meanwhile, poor Andrew can only shrug and say that he rebalances his index fund portfolio once a year on his birthday. Yawn.
If you’re a Couch Potato investor, you’re going to have a FOMO crisis of your own at some point. It won’t be easy, but you’ll need to shake off that nagging feeling that there’s something better out there. I’d start by taking stock-picking stories with a heaping tablespoon of salt.
Index investors have nothing to fear
Day traders may boast of big wins, but have they really calculated their overall return accurately (most investors have no idea how to do this) and compared it to an appropriate benchmark? If you’re trading small gold mining stocks, for example, you should know that the BMO Junior Gold Index ETF (ZJG) returned almost 33% over the 12 months ending March 31. So if you netted 25% or 30% over that period it might sound impressive, but your stock-picking skill was actually negative.
Moreover, I think it’s likely that Andrew’s coworkers are sharing their successes and keeping their failures to themselves. Researchers Brad Barber and Terrance Odean, who have been studying amateur traders since the 1990s, have found a consistent tendency for people to sell their winners and hang on to their losers (“it’s not a loss until I sell it”). In a 2011 paper, Barber and Odean catalogued the many ways that individual investors sabotage themselves and concluded that those who “ignore the prescriptive advice to buy and hold low-fee, well-diversified portfolios, generally do so to their detriment.”
If you’re still feeling pangs of FOMO, ask yourself why you’re attracted to strategies that promise to beat the market. Do you have a financial plan that will only work if your returns are exceptionally high? Have you spent years capturing market returns with a disciplined, low-cost indexing strategy and found these returns were too low, even though you likely beat 90% of professional money managers?
My point is that no investor needs to make market-beating returns a primary objective. If you fail to reach your long-term financial goals, it won’t be because your portfolio captured “only” index-like returns and no more. But it might be because you tried to do better and ended up doing far worse.