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Brett Investment - Diversified Portfolio

The collapse that never happened

If like me you have teenage children (or indeed you may have a grandchild version) you will be aware of the acronym FOMO (fear of missing out). Introduced to the Oxford Dictionary in 2013 it is described as: “Anxiety that an exciting or interesting event may currently be happening elsewhere.”

Not only can FOMO make us neurotic it can also make us terrible investors…for evidence look no further than the Brexit vote…

Staggeringly leading up to and in the immediate aftermath of Brexit investors withdrew a total of £5.7 billion out of UK-based Stock market funds (source: Morningstar).

In short as things got a little hot in the kitchen investors, feeling anxious, succumbed to that urge to act… even worse their advisers let them OR worse still advised them to do it!

In an investment context FOMO is that regret we know we will face if others make money, or avoid losses, while we stand and do nothing. In short FOMO makes us do dumb things. History shows us that Brexit isn’t a one off. Previous decades are littered with anxious investors withdrawing funds when markets are falling (or anxiety is at is greatest) and compounding this by (re) investing when markets are doing well, at their most expensive prices and are about to tank! In short when markets are falling, outflows increase, when markets are rising inflows increase!!

If you could actually design an investment strategy better aimed at damaging your portfolio return it would be hard to find one!

Professional (active) fund managers are little better. In June the amount they held in cash – their way of staying on the side-lines – was 5.7 per cent of total assets, the highest level since November 2011 (according to Merrill Lynch’s monthly survey of fund managers).

This highly paid herd mentality is surprisingly commonplace among fund managers. Essentially the more assets they collect, the more they get paid. While it is true the best to way to collect assets is to be the best performing fund, it’s rare that funds stay at the top of the table for long.

What is certain, however, is that being at the bottom is the best way to lose assets…leading to the aforementioned herd mentality.

Thankfully there is better way of managing money which doesn’t involve trying to forecast (guess) what is going to happen next…it is simple (if unsexy), low cost and logical. It’s called buy and hold.