Financial markets are littered with acronyms and one of the more pervasive, particularly in recent years, is FOMO, or fear of missing out.
Figuring out what FOMO means isn’t difficult. Simply put, it implies that market participants are willing to bid up assets that have already been on torrid paces because they don’t want miss out on further gains. That’s interesting for multiple reasons, not the least of which is the point that many investors are programmed to “buy low and sell high” when that opportunity presents itself.
Another reason FOMO is interesting is that many market participants are afraid of buying stocks at or near record highs. In reality, they shouldn’t be. Consider the following data I cited in a piece earlier this year.
“On average, 12-month returns following an all-time high being hit have been better than at other times: 10.3% ahead of inflation compared with 8.6% when the market wasn’t at a high. Returns on a two-year or three-year horizon have been slightly better on average too,” notes Duncan Lamont of Schroders.
Embrace the Highs
There are other data points confirming why investors shouldn’t be pensive about buying stocks or index funds at highs. As Michael Batnick, a managing partner at Ritholtz Wealth Management, points out, the S&P 500 averaged 38 all-time highs per year prior to the 2022 bear market.
No such feats were accomplished last year, but as of April 10, the benchmark domestic equity gauge already hit record levels on 22 occasions – impressive work in less than 3.5 months.
“All-time highs are interesting in the emotions they elicit. Some people might be euphoric as their accounts reach dollar amounts never seen before. Others might fear this is as good as it’s going to get and worry about a trap-door scenario,” writes Batnick.
He makes another interesting point about investor behavior when equity market records are hit. Many of those market participants sitting on large hoards of cash become reluctant to deploy that capital into risk assets because they’re afraid they’ve already missed out.
Just Get Over It
Admittedly, “just get over it” isn’t solid advice for most of life’s trials and tribulations. It’s “wisdom” that would run a lot of therapists out of business. However, it has some applications regarding the ability of stocks to build on gains and record highs.
While it’s common for investors to feel that when an all-time high is realized “the easy money has been made” or that they’re late to the party, scared money doesn’t make money. Likewise, data confirm that buying at highs is actually a better strategy than picking any old day in which to hit the “buy” button.
“The good news is the data doesn’t support those feelings. On average since 1970, the S&P 500 has done better 1, 3, and 5 years after making an all-time high than picking a random day,” concludes Batnick.