How to overcome investing FOMO

It was another reminder that if you’re an index investor with a long-term approach, you will never be able to share entertaining anecdotes. That’s not to say you won’t be a success story: indeed, if you’re just able to earn market-matching returns, you’re likely to outperform at least 90% of professional money managers, let alone your tablemates at a Japanese restaurant. But you will never be able to crow about a great stock pick or a genius market call. Meanwhile, the loudmouths around you will boast about their conquests and give you an acute case of FOMO.

Even if you have no patience for stock picking, at some point your plain-vanilla ETFs are going to lose their sexiness, and you may be tempted by “smart beta” and its promise of outperforming traditional indexes. Those backtested results are certainly compelling, and the marketing material sure does sound clever. The temptation happens to all of us at some point.

Part of the problem is we’re conditioned to think that simple solutions are unsophisticated. Certainly, passive investing is often presented that way: “It’s fine for people who aren’t able to do the research.” Right. It may help to know that many of indexing’s staunchest advocates are finance professors with Nobel Prizes on their mantels. Academics frequently favour passive investing, not because they “aren’t able to do the research,” but precisely because they focus on data and evidence, not the anecdotes about investors who beat the odds. (Although academics and other experts are hardly immune from the same temptations that cause so many people to get bored with indexing.)

Simple solutions can seem even less appealing as your portfolio grows. The convenience of an ETF portfolio is one of its great virtues, but it can give the impression that it’s not diversified enough for a nest egg of $1 million or more. On the surface, it looks like you’re putting hundreds of thousands of dollars into just a few holdings—or, in the case of an asset allocation ETF, just one fund. But I’ll stress again that with a few ETFs you can hold tens of thousands of stocks and bonds from around the world. That’s about as diversified as one can get, even with millions to invest.

To add some perspective, Warren Buffett has said he wants 90% of his estate to be invested in an S&P 500 index fund when he dies. Maybe his executors “aren’t able to do the research.”

If you’re fortunate enough to have a seven-figure portfolio, there will be no shortage of salespeople ready to flatter you by offering access to exclusive opportunities available only to “accredited investors.” These include hedge funds, private equity, peer-to-peer lending, real estate partnerships and on and on. It’s possible that some of these opportunities will go on to deliver outsized returns without undue risk, but you will likely have to accept high expenses, illiquidity and a lack of transparency.

You’re not sacrificing anything by taking a pass and just sticking to index ETFs. And you’re not missing out on anything except disappointment.

Dan Bortolotti, CFP, CIM, is a portfolio manager with PWL Capital in Toronto. He works with clients to combine investment management with long-term financial planning. He also promotes investor education through his blog, articles and podcast.

This article was excerpted from Reboot Your Portfolio: 9 Steps to Successful Investing.