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The Fear of Missing Out

A friend who had recently finished reading my book asked me at dinner yesterday, “Investor behavior seems to greatly influence the direction of the market. What are investors currently thinking and how are they behaving in this market? People seem to have lost their fear after a huge market rally since March of last year.”

That’s actually a great question as it is a misconception that fear does not exist in this surging market. Fear exists in any market, although its form, scope, and who it affects can be different.

Let’s step back and look at the current market environment. The recent financial crisis had wiped out about 40% of stock values in 2008 and left a huge dent in many investors’ portfolios. While the market has been surging since March of last year, the S&P 500 value is still down about 24 percent from its all time high of 1,565 points in October of 2007.

Some investors who had lost their fortune during the crisis are reluctant to take any kind of risks anymore. In behavioral finance, this is called the “snake bite” effect where people who had lost money (been bitten once) would be very fearful to invest again, regardless of how attractive or solid the opportunity really is. You can compare this environment to the Great Depression era where many people who had gotten burnt swore to never look at the stock market ever again. A more recent example that demonstrates the snake bite effect would be the bursting of the technology bubble in year 2000 that had wiped out the wealth of many dot com investors. Some people would never touch a dot com stock after that.

But the fear that is dominant in the market today is actually the “fear of missing out.” Whether in a restaurant or at work, everywhere you go you will hear people expressing their regrets of not having invested more when the market was at its bottom last year. As a matter of fact, you can start to see that investors who were not fully exposed to the market are flocking into it right now. They feel that they have missed the boat as they witnessed empty handedly their other friends making handsome investment gains.

This phenomenon is very similar to the one that led to the aforementioned technology and the recent housing bubbles. People who were fearful to invest at the beginning were proven wrong and they found it painful to witness the money that they could’ve earned passed by in front of their eyes. The feeling was especially unpleasant when they sat there being proven wrong for months or even years. After awhile their spouses would yell at them for being too hard headed, agent/brokers would say see I told you so, and sometimes even the dog would start barking at them too.

And so eventually people rushed in and believe me most people who flocked into the market did it at the very end of the bubble. After all, it is when the last person jumped onto the bandwagon…