One of the first decisions you need to make as a successful investor is determining your risk profile, or sometimes called, risk tolerance. In normal times (unlike recently), if you take little or no risk, you will likely not make any money. No guts no glory - no risk no return. Conversely, if an investor is willing to take a significant risk, they should be compensated with a high level of return. Fortune favors the brave.
There are plenty of online questionnaires to ascertain your risk profile. Some might ask how much return you NEED to make to reach your financial goals. Some believe that investors with considerable savings don’t NEED to take as much risk because they already have money. On the other hand, investors without a lot of savings might feel forced to take conservable risk, to “catch up.”
I would offer another approach. Balance your FOMO with your FOFO.
Most of us are familiar with the acronym - FOMO – Fear of Missing Out. Webster.com defines FOMO as “Fear of Missing Out: fear of not being included in something (such as an interesting or enjoyable activity) that others are experiencing”. I have seen, and felt, this phenomenon many times over the years as an advisor (and investor). Most recently, after the initial 2020 selloff from Covid, many investors felt like they were missing the boat when they didn’t jump on the Covid stock or “meme” stock band wagon. Zoom or Peloton stock or the hysteria surrounding GameStop or AMC Entertainment shares, would be examples.
I sometimes tell investors, take enough risk, so that in the good times, you feel like you are participating. But don’t take too much risk, so that in the bad times, you can’t sleep at night, and you end up making a bad decision at the wrong time.
That’s where FOFO comes in. Fear of Freaking Out! Haven’t heard of FOFO? Don’t be surprised because I made it up!
Most investors have a breaking point where they acquiesce or throw in the proverbial towel. They cry Uncle and reduce risk, or maybe sell everything, at what often ends up being the bottom. Unfortunately, as a veteran financial advisor, I’ve seen this happen a couple times in my career.
One way to tell if you have too much risk in your portfolio is to stress test your portfolio with your emotions. In 25 plus years as a financial advisor, I have yet to find the investor who likes to see their portfolio decline. That said, I have interreacted with investors with wildly different abilities to sustain or ride out volatile markets.
If you are trying to determine, or reaffirm, your risk tolerance, consider your FOMO vs your FOFO. We all know, no one can consistently time the market. So, ask yourself, how much of a steady bull market do you need to participate in to feel like you are not missing out? Once you arrive at a number, then ask yourself your “freak out” number. If your portfolio declined by 10%, would you be thinking it’s time to call it quits or dial back risk? How about -20% or even -30%?
I would argue, determining your risk profile, is as much an art as a science. When thinking about risk, remember to consider the up as well as the down. In other words, consider equal parts FOMO with FOFO. All of this information will help you, and perhaps your financial advisor, construct a portfolio you can live with in the up, as well as the inevitable down markets to come.
Robert F. Carrigg, Jr., CFP®
rob.carrigg@stewardpartners.com
603-427-8840
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
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