Is FOMO back? : Science of Wealth

The original version of this article first appeared in The Business Times. 

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The major financial markets have been on a tear after the US Presidential election. All risky assets from equity markets, especially in the US, from high-flying tech stocks to crypto like Bitcoin, have all been on a continuous upward trend. Despite the fact that markets were up double digits this year after a double-digit return last year, there seems to be no letting up. 

FOMO, or the fear of missing out, is in full bloom – from a behavioural perspective, this combines the two worst emotions when it comes to investing – greed and fear. 

We hear many investors struggling with the markets even as they break out to new historic highs. Only a small fraction of investors were fully invested in equities at the beginning of the year, and even fewer remained invested throughout. Many investors have tried to take profits or attempted to time the market by jumping back in.

Difference between investment returns and investor returns

Jack Bogle, the founder of Vanguard, once wrote that the average equity fund investment gained 173% from 1997 to 2011, but the average equity fund investor earned only 110%. 

Investment returns represent the returns that an investment could generate. On the other hand, investor returns reflect the returns actually experienced by investors. The difference between these two returns is often attributed to individuals’ poor decision-making, which is influenced by emotions and behaviour.

Despite many performing asset classes, the average actively managed portfolio return of their investors was a meagre 2.5% annualised in actual returns achieved over many decades, a study by JP Morgan Private Bank showed. If all money is just left in a low-cost, passive index fund, they would have generated 4 times that return annually, or 10%. 

That may not seem like much, but this number grows exponentially over time thanks to the power of compounding.

Over 30 years, $10,000 invested would have become $174,494 at 10% annually, versus just $20,976 at 2.5%. This is the difference between investment returns and investor returns that Carl Richards talks about in his book, The Behaviour Gap. 

Over the past two decades, investment returns from benchmark indices like the S&P 500 Index and global stock markets have averaged between 8% and 13% annually. The S&P 500 Index led the way, with an average annual return of 13% over the past 15 years, while the Nasdaq has yielded returns above 16% during the same period.

However, most investors fail to achieve that number, as they chase markets, and put more money to work at the top because of FOMO, or do not invest enough or fully, after taking profits too early and not being able to get back in and miss the boat. 

If we look at the average performance of all US mutual funds, more than 90% of the funds have underperformed the benchmark in the past 15 years, according to S&P Indices versus Active (SPIVA) scorecards.

The bigger issue is that top-performing managers change each year, making it impossible for any manager to consistently outperform for five years in a row. Even Warren Buffet’s Berkshire Hathaway, known for its remarkable long-term performance, has underperformed the S&P 500 index over the past 20 years. Consequently, investors have not kept pace with the investment returns of major markets, especially in the US. If you are wondering about the future of US market dominance, it may last longer than anticipated. 

Why could the US market dominance continue? 

The new Trump administration introduces the prospect of more explicitly US-centric policies, such as deregulation and smaller government, lower taxes and higher tariffs. 

Perhaps unintentionally, this has sparked concerns of higher inflation for longer, leading bond vigilantes to price down (and yields to increase) on US treasury bonds and maintaining a stronger dollar as a consequence.

One of the most salient features of the new administration is also on the geopolitical front, heightening uncertainty about the administration’s mixed signals about China, Ukraine, Russia, North Korea, and the relationship between and among the Middle Eastern nations. This contributes to investors seeking refuge in US dollar assets. 

Emerging market bonds shine

What may surprise many is that, apart from US equities, one of the best-performing asset classes in 2024 is emerging market bonds, with a return of more than 15%. 

The performance divergence between the EM bonds and equities is notable, as the dollar-denominated EM bonds with wide spreads allow investors to generate positive returns. These returns are based on the expectations that EM countries will maintain their creditworthiness, while the Fed’s rate cuts and taming inflation drive the credit spread to narrow. 

In stark contrast, EM equities have languished over the past few years. Despite a brief rally fueled by optimism around a recovery of the Chinese economy and around the AI-driven tech rally in Taiwan and Korea, EM equities have once again slid for its vulnerability to the tariff hikes from the Trump administration and the impact of a stronger dollar. 

The futility of predictions

When I wrote the first article of this year, I noted how many people had been locking in a Fed rate cut and overweight to bonds, which I cautioned as predicting anything is an investment strategy fraught with danger. 

The bond market again disappointed as the bond yield, which initially fell, rebounded to higher levels again as the sturdy US economy, sticky inflation, and the Trump election put paid to any expectations of a rapid decline in both Fed and market interest rates. 

Again, as we approach the end of the year of poorer-than-expected bond returns and better-than-expected equity returns, we are bracing ourselves for a flurry of 2025 outlooks and market strategy forecasting that this or that will happen to the economy and the markets. 

The one thing we know for certain is that nothing is known. In reality, we are terrible at predicting the future. 

The proven theories in investing

Rather than basing your investments on a whim, FOMO, or an unknown future, you should anchor yourself on the proven theories of investing. 

1. Take emotions out of the equation by implementing a rules-based process of plan of investing. 
2. Start with a core allocation to equities and bonds as the longer you invest the returns will revert to the average. 
3. Have the discipline of a regular savings plan that neutralises volatility and uneven returns. 
4. Whenever markets are down, that means you get to invest at lower levels earlier in your investing period. Even if you are in your 50s like me, you have 30-40 years of investment horizon left.  
5. Keep turnover low and costs as low as possible as they directly and negatively impact returns. 
6. Keep it as simple as you can and keep it personal (crystalise what goals are you investing for)
7. The most important trait in removing your personal biases and reducing the negative effects of being driven by your emotions is to be honest with yourself. 

Li Lu, an investor dubbed the “Chinese Warren Buffet” by Charlie Munger, is quoted as saying, “If investing is trying to predict the future, and the future is inherently unpredictable, then the only way we can do better is to assess all the facts and truly know what you know and know what you do not know. That’s your probability edge.” 

Being honest with yourself is essential for achieving your goals. This includes understanding what is driving your FOMO. Only then you can crystalise the above six points to develop the personal investing plan that aligns with your needs. A trusted financial advisor will help you journey and get there with you. 

Even if the guarantee of success is never achievable, we can do what we can to raise the probability of that success. And remember, success looks different for different people. 

As another year ends with markets at historic highs and a new year dawns with its new set of uncertainties and opportunities, let’s not focus on our emotions of FOMO, but take the time to reassess and plan ahead, so that we maximise the probability of success investing in 2025.

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Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

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