Let’s face it, no one wants to be the one person that missed out on what seems to be a once-in-a-generation investment opportunity simply because you’re trying to do the right thing. This decision is especially difficult at a time when making money in the markets seems so easy. Without a doubt, the fear of missing out on a great opportunity is so powerful that in the past it had encouraged otherwise rationale investors to put money into worthless tech companies in 2000 and prompted hairdressers in Florida during the housing boom to purchase three or four rental homes they just couldn’t afford. Even so, as Jeremy Grantham puts it, “there’s nothing more irritating than seeing your neighbors get rich.”  

There’s no doubt that, in certain segments of the markets today, individuals are experiencing phenomenal returns in their holdings of tech, bitcoin, penny stocks and by participating in the options market. For example, the NASDAQ 100 index gained 96 percent from the market bottom in March 2020. Bitcoin, also, has gone from a price of $8,880 twelve months ago to well over $34,000. Names of penny stock companies (stocks that trade for less than $5 per share) have doubled or even trebled in a matter of weeks and months and now account for a growing share of trading activity. With results like this, it’s hard not to feel like you’re missing out on something spectacular when you’re watching from the sidelines.

And it becomes increasingly difficult to remain on the sidelines when these seemingly effortless opportunities to make money are minting new affluent lifestyles every day. To make matters worse, today’s mainstream media is increasingly caught up in reporting on the ease with which amateur investors are turning their stimulus checks into thousands of dollars in gains. Likewise, social media is blowing up with content from amateur investors promising fast returns by following simple rules for speculating in the markets.  

To many of us, it’s easy to look at what’s going on today and call it for what it is: it’s market speculation. Even so, with seemingly everyone partying and making money hand over fist, the psychological pressure may grow to the point where you begin to ask yourself: “am I missing out on a great opportunity?” Even when you know that this latest investing craze completely flies in the face of your disciplined savings and investment plans.

So, what can you do when going against the crowd feels increasingly uncomfortable and to the point where fear of missing out is eroding your willpower to remain committed to a disciplined investment strategy? During times like these, it’s crucial to remember that what’s going on today has happened before, and it will likely happen again. That’s why gaining some perspective and reminding yourself why you became an investor and what you have to lose is essential to staying grounded when you feel tempted to follow the crowd and are potentially setting yourself up for failure. So how exactly did we get here?

It’s Happened Before, and It’ll Happen Again

Well, it’s vital to recall that much of the gains in some portions of the markets have been fueled by easy money policies and individual investor euphoria and not sound fundamentals. Recall that skyrocketing unemployment caused by a devastating global healthcare crisis last year led to trillions of dollars being pumped into the financial system and the economy. Fueled by access to cash and success in the early 2020 rally, some individuals today have shifted their focus to the highly speculative market segments we mentioned earlier. In many cases, price action in these parts of the market have little, if any, relationship to company value, revenue, or earnings growth.  

Rather, market action in these cases appears to be solely based on speculation of what the asset’s price might be tomorrow, next week or next month. And to this point, one mantra driving participant behavior is “prices can only go up.” Ultimately, we could say that the Greater Fool Theory is driving the markets. More specifically, this theory states that an asset’s value is driven solely by price expectations and not some fundamental underlying factor.

The Greater Fool Theory

Now, if you’re not familiar with the Greater Fool Theory, it goes something like this: I know that the price I’m paying for this asset today doesn’t make much sense, but that doesn’t matter. The market is hot, and there’s so much demand for a given investment that there will almost certainly be a buyer sometime soon. Therefore, I’m going to buy today hoping that I can flip this asset to the next newly minted naïve investor.  

This mindset has become so pervasive that it’s spread across discussion groups that were once personal finance strongholds for the disciplined do-it-yourself investor. For instance, White Coat Investor recently shut down a Facebook group after becoming a hotbed for bitcoin speculators and hot-stock tip discussions. In another example, Bogleheads community members have increasingly become divided on whether individuals should take out a personal loan or use their credit card to purchase shares of already high-priced tech stocks. Does what’s going on today at all sound familiar to you?  

Recall that skyrocketing US home values in 2006 and 2007 didn’t happen because of a baby boom. They happened because interest rates were low, and mortgage lenders and house flippers believed that prices would rise forever. This sentiment became pervasive throughout the media and government policy and led to many TV shows and seminars devoted to getting rich in real estate. When the music stopped, however, the finances of millions of individuals were devastated. While it’s still too soon to establish how our story will play out, there’s a good chance that the asset bubbles forming today likely won’t end with a soft hiss but with a loud bang.

What’s Your Motivation?

Sometimes having a rational understanding of the facts may not enough for you to shake that uncomfortable feeling that something good might be passing by. If you find yourself in this situation, you’ll likely need to dig deeper to gain a clearer perspective and stay grounded in your long-term plans. And this begins with setting aside some time to consider your core motivation for saving and investing before you get caught up by what’s happening in the markets today. To this point, you’ll need to ask yourself if your primary motivation for investing is to keep up with the Joneses or to carve out your own definition of financial independence.

You’ll likely recall that individuals like you have achieved financial independence by saving prudently, earning a steady rate of return on their investments, and making their money work for them. More often than not, individuals on the path to financial independence are focused on systematically creating, growing or preserving their wealth and care less about what others are doing with their money. So, if you’re tempted to participate in the current market exuberance, now may be the time to ask yourself if the choices you’re considering align with behaviors that lead to long-term success.

If your priority is to generate a steady rate of return over the long run, then making incremental, short-term bets on what appears to be an outsized financial gain may not cut it. 

Indeed, history has shown that a disciplined investment strategy, adhered to over a long period, can lead to exponential savings growth. Various academic studies have also illustrated how asset allocation and not stock selection or market timing have been the most significant determinant of investment returns.

How will it Feel to Lose?

By now, the various facts and arguments discussed here may not be enough to convince you to stay the course. You might be considering allocating just a small portion, rather than all of your savings, to these highly speculative segments of the market. If this speaks to you, then you’ll need to think hard about your pain tolerance. In a recent note to investors, UBS warned that some of today’s speculative assets could see their prices fall to zero. And to this point, a key risk in today’s markets is that few individuals remember what it’s like to lose money when winners are created seemingly every day.  

If you’re tempted to dabble in parts of the markets where sentiment is hot, ask yourself how you’ll respond emotionally should that investment go to zero. Academic research has shown that the negative emotions that an individual feels by losing a new gain is more potent than not having made money in the first place. What’s more, taking your focus off your long-term investment strategy during a time of emotional turmoil might leave you open to questioning your overall investment process. When the music eventually stops, and the party is over, there will be a rush to the exits, and that’s not the time you want to be figuring out what to do with your investments, especially when emotions are running high.

Don’t be the Bagholder

Finally, don’t be the bagholder. Make no mistake: bubbles do eventually burst. And a bagholder is an individual who holds on to their declining speculative investment, hoping that prices will eventually recover. Whether we’re talking about the Tulip Mania, South Sea Crisis, Tech Bubble or Housing Crisis, they all start, grow and end the same way. 

No one can say for sure, in our current situation, whether that moment will come next week or next month. 

Either way, rather than trying to time the market, we recommend looking ahead to long-term investment opportunities positioned to perform well at this stage in the economic cycle. Many indicators suggest that the US economy could experience a strong recovery in 2021. 

And from this perspective, yesterday’s winners can quickly become tomorrow’s losers. That’s why it’s vital now more than ever to spread your investments across high quality, uncorrelated assets that offer high relative risk-adjusted returns.  

As we’ve discussed in previous reports, we believe that a market rotation is currently underway. Value names, small-cap and emerging market stocks are well-positioned as the US and global economy recovers. A key risk to this outlook, however, is predicated on accelerated COVID vaccination rates. Without this, a return to normal may not happen as soon as the second half of this year. 

Even so, accommodative fiscal and monetary policies are likely to support higher growth levels into the coming year. Make no mistake, there are no easy answers to the powerful psychological forces of going against the crowd. But by looking past the latest investing craze, reminding yourself of your financial independence goals, digging deep to figure out what you have to lose, and staying committed to a long-term, disciplined investment strategy, you might just be able to maintain your sanity when it seems like the markets are going crazy.