Why FOMO might be harmful in your retirement plan
NEW YORK, NEW YORK – SEPTEMBER 16: People pass a GameStop store in Lower Manhattan on September 16, … [+]
Bitcoin, Dogecoin, GameStop GME and AMC are some on a list of those who have sparked dreams of early retirement and riches beyond their wildest dreams for many. Every day that you miss these momentary “opportunities”, you feel like you are another year behind your goals. Fear of leaving out (FOMO) can be a powerful emotion that often leads to hectic, myopic decisions. There’s no question that many of the digital currency and meme stocks like the ones mentioned have made small fortunes for some investors. Thanks to social media, these stories have been shared, favored and followed millions of times, fueling the flames of an already hot investment environment. All of the above asking, if you feel left out of the party, what do you do now? Let’s discuss the vulnerability of these trending investments and further explain the purpose of the money you have saved.
In late April, the S&P 500 was up 11.98%, a growth rate far higher than the average annual market return. Compare that to GameStop’s growth from $ 400 million to $ 22 billion in market cap, a 5,500% increase at its peak. Digital currencies rose from $ 757 billion to over $ 2 trillion in early 2021, an increase of over 264% as a group. This explosion in value makes 11.98% feel that this would be a reasonable daily return on their average retirement accounts. As a result, we hear more and more conversations about investments going to the moon as if nothing is stopping them from rising any further. On the other hand, you should be wondering what the cost and likelihood of investing in social media trends will rise or fall.
Risk can be measured by how high an investment can be relative to the lows the lows could hit. The higher the roller coaster, the steeper the likely drop. A ratio that measures the ratio of ups and downs to a typical market index is defined as beta. When a stock has a beta of one, it means the investment is moving up and down at the same rate as the S&P 500. Bitcoin and GameStop, for example, have a beta that’s more than five times the risk of an average stock. This is evidenced by GameStop’s recent decline from $ 22 billion in market cap to around $ 3 billion, down 87% in just a few weeks. Bitcoin has lost 35% or more of its value several times in the past few years.
The appeal of high-risk, high-beta investments has been seen many times throughout history. Many have come and gone and the legends of them grow like a good fishing story. What disciplined investors have learned is that if an investment goes down in half, they’ll have to double the return in order to make up for it. Having more consistency over time will help you achieve financial goals and be much less stressful in the process. Because of this, the concept of asset allocation has been an excellent tool for investors trying to meet their retirement goals for decades. They learned that risk control is just as important to their bottom line results.
Before investing your hard earned money, define the purpose of your dollars, determine what rate of return you will need, and stay disciplined to achieve that goal. Of course, you can also find a finance professional you trust and work with them. A prudent investor has a plan and sticks to it. If you have money to gamble outside of your budget, do your homework and invest wisely. Just don’t let the fear of missing out on your journey towards your final age goals bother you.