Most of us suffer from FOMO – the fear of missing out. As human beings, we’re hard-wired to chase performance.
From our cars to our breakfast cereal we want the fastest, best, newest, most improved, and so on. Maybe this is because marketers know exactly which buttons to push or perhaps it's just an innate human trait.
Whatever the reason, we’re terrified of missing out on the next trend.
But this trait leaves us like a dog chasing its tail. We’ll never truly catch it and if by some oddity we did manage to catch our tail, then what? We’d just start chasing it again.
We are never happy. We are always looking for the next big thing.
So, it is no surprise that we also chase performance in our investments. Nobody cares about a stock until it suddenly starts moving higher.
Then everybody wants to know more. How high can it go? Which is the next big stock? Is it too late to buy?
We’re also consistently checking our existing investments and comparing them against others.
And when we’re buying new investments it’s mostly about performance – nobody buys from the bottom of the performance table.
We always start our search by looking for the top performers.
All this hype around performance, and typically short-term performance, is not good for us.
I just got an email from a reader who owns an exchange-traded fund (ETF) that has added about 6% since they’d bought it, but the reader is very concerned because another ETF has done more than double the return over the same period and now they want to know if they should switch.
But this question misses several important points.
1. Consider the level of risk you can take on
Was it the investor’s intention to buy the ETF that would produce the best returns? That is unlikely as that would have entailed a massively risky triple-geared ETF issued over some exchange or asset that likely nobody had ever heard of and that would more likely crash than increase in value.
So, we must accept that we’re buying within a comfort zone of risk we’re happy with and that we are unlikely to have the ETF offering the best returns.
And that’s fine, we want some risk, that’s why we invest, but we want to be exposed to manageable risk, not the sort of risk that could bankrupt us.
2. Why did you buy a particular ETF?
So, then the question is why the initial ETF was bought. Usually the answer is because the expected return was going to be super-hot and massively wealth-creating in double quick-time.
But this is not an answer. An ETF is selected according to a number of criteria, such as the market or assets it covers, its cost, diversification, whether it is offshore or local, among others.
Most of the time we may not hold the best-performing ETF, but if we selected it carefully, the product we are holding is of a high quality and its performance will improve even more over time.
3. Focus on the long term
Time is the other important point. The comparison period from the reader above was over just more than six months. Now, six months is nothing in the long-term world of investing.
This is a big issue; we buy for long term but measure over the short term? Our buying and measuring needs to be in sync, with both focused on long term.
4. Don’t panic if you did buy the wrong product
Now, of course it is possible we did buy the wrong ETF but this is easily addressed. We need to revisit why we bought it in the first place.
Were we mistaken? Has some part of our reasoning changed? Has our risk profile changed?
But we need to avoid constantly checking performance and worrying that we’ve erred if we’re not winning every day.
Of course we need our portfolios to perform, otherwise we could stop trying. But we need to tread carefully and give our investments time to give us that much-desired performance, revisiting them every year or so to make sure they still match our investment criteria.