How To Beat FOMO

By Dr. Robert Votruba

Surprised at how well the economy and markets have performed lately?  You’re not alone.  It’s hard to believe that it was barely one year ago when the Wall Street Journal reported that approximately 60% of the economists they surveyed were expecting a recession.   In hindsight those predictions seem so far off, leading one to wonder why those same economists were asked for their opinions again (this time, they put the odds of recession at around 25%)[1].  Instead of facing a recession and a stock market correction, we have benefited from a resilient economy and robust financial markets, despite the unprecedented political environment. The job market remains strong, inflation continues to fall, and the S&P 500 has reached an all-time high over 30 times in 2024.   Yes, at first glance, things seem rosy.

Those economists calling for a recession cited inflation and a quick and dramatic rise in interest rates as the factors that would cause it.  The Federal Reserve Board, led by Chairman Jerome Powell, offered a more optimistic projection – the so called “soft landing”.  The Fed surmised that they could put a lid on inflation by increasing interest rates and without driving the economy into a recession.  Surely, we will face a recession in the future since it is a natural part of the business cycle, but at this point, few would argue that the Fed has not achieved their objective.  Aside from a mountain of government debt, many of the pandemic’s economic effects are now behind us.  So much so that the Fed has hinted at interest rate cuts later this year, though Chairman Powell noted that “Because the U.S. economy is strong and the labor market is strong, we have the ability to take our time and get this right”.   Either way, should the Fed lower rates, barring another economic disaster, they are unlikely to approach the historically low levels that we lived with from 2008 – 2022. 

Good news about the economy coupled with optimism around the benefits that artificial intelligence (AI) will provide to productivity has driven the S&P 500 near all-time highs.  Though most sectors of the market have rallied in 2024, the gains have been especially pronounced in the largest companies that are most likely to reap the benefits of mass AI adoption.  

The S&P 500 attempts to measure the performance of the stock market by tracking the largest 500 stocks in the U.S.  But not all 500 are treated equally.  Rather, the S&P 500 is calculated in such a way that the largest companies have the most impact.  So, behemoths like Microsoft and Apple each account for over 7% of the index’s performance, whereas company number 500 accounts for a mere .01%.  

The big companies have been getting bigger.   Today, the largest three companies (Apple, Microsoft and Nvidia) make up approximately 20% of the total value of the S&P 500, while the top five account for 27%.  The weight of the top ten holdings is now over 35%, which when compared with the average of the past 35 years, 20%, is high.  Because so few stocks have accounted for the lion’s share of this year’s performance, many have labeled this a “narrow rally”.  

While technology related stocks may have stretched valuations, many are quick to halt comparisons to the tech bubble of the late 90’s.  Because unlike then, most of the largest companies in the sector are rich in cash, highly profitable and have expected growth rates and margins much higher than the rest of the market.  Interestingly, the market has been more “top heavy” in the past, and according to research by Goldman Sachs, the S&P 500 rallied more than it declined during the first 12 months following former instances of peak concentration.  And this level of concentration is not unique to the U.S. In the U.K. the top 10 account for nearly 50% of their main index, while Germany (57%), France (58%), Canada (44%), and China (43%) all would not be places to hide from this dynamic.

Yes, gains have come easy to the goliaths.  So much so that to eschew diversification in place of simply buying stock in a few of these giants seems tempting, until one studies history.  Capital markets are always evolving.  Stalwarts that seem like pillars in our economy come and go regularly.  The following table[2] illustrates changes in the top 10 S&P 500 companies over the past 30 years.  On the left are the 10 largest companies in the U.S. today.  Highlighted in grey, in the columns that follow, are those companies from 10, 20 and 30 years ago that are still in today’s top 10.   For instance, only four companies from 10 years back (Apple, Alphabet aka Google, Microsoft, and Berkshire Hathaway) are in the top 10 today.  Just one from 20 years ago is still on that list (Microsoft) and amazingly not one of the top 10 from 30 years ago made today’s list.  You can see the names, and can likely figure out how some of these individual stocks have performed.  Simply put, buying a handful of today’s top stocks, without diversifying into other areas of the market, might not be a great idea.

The best way to protect against risk is to diversify.   Diversification means not only having exposure to many stocks, easily achieved by owning ETF’s and/or mutual funds, but also by holding stocks in different categories, across different sectors, and styles.  Yes, the S&P tracks 500 stocks, but there are over 4,000 that trade in the U.S. today.    Most of those stocks have not experienced the same recent growth as AI related companies, which means that their valuations are not as stretched.  The benefits of diversification do not have to come at the cost of lower returns either, as researched by Nobel Prize-winning economist Harry Markowitz.  Though a couple of weeks is far from a trend, over the past two weeks we have begun to see the benefits of diversification as small stocks have outperformed their larger counterparts by the widest margin since 1986.

If seeing a few stocks rise at breakneck rates ignites the onset of FOMO, a look at recent history is the cure.  FOMO is slang for “fear of missing out” and describes the feeling of anxiety one gets by not being a part of something fun, or profitable, that everyone else seems to be a part of.  In the world of investing, it can result in a “buy high, sell low” strategy that can wreak havoc on any financial plan.  A popular ETF (Exchange Traded Fund) provides a clear illustration of how behavior triggered by FOMO can impact investors.

The studied example is a concentrated fund (it holds less than 40 stocks) that invests in companies that are deemed to focus on “disruptive innovation”, most of which fall in the technology and heath care sector.   Prior to 2020 the fund was little known, and not attracting meaningful dollars from investors.  After stellar performance in 2019 and otherworldly returns in 2020, people noticed and jumped on the bandwagon. The following chart, provided by Morningstar, illustrates both the amount of money coming and going (blue bars) and the overall assets managed (red).  Easily noticed is that most investors piled in during late 2020 and early 2021, when the eye-popping returns were already in the rearview mirror.  Things have not gone as well for the fund since.  An investor who purchased the fund in late 2020 would a need a return of 160%+ just to return to even.  Many have begun to exit the fund, likely at a loss.  FOMO caused them to buy high and sell low.

With an election around the corner, and markets hovering near all-time highs feeling a bit uneasy seems rational.  A look at history might again be a remedy here.  Paradoxically, all time highs have been a good time to invest, provided a diversified approach was used.  According to Dimensional, average returns over one, three and five years after a new month high are similar to those after months at any level, as illustrated below[3].

While market volatility may increase once the presidential election nears, here too a look to the past is instructive.  Though each party has their own economic agenda, even if the similarities around trade and deficit spending are striking, it’s hard to argue that a President has much of a hand in the performance of financial markets over the long term, as shown here.(4)

Avoiding FOMO is easier said then done. It’s persisted for decades, living under the name “keeping up with the Joneses”.  And strong emotions and biases are often triggered around elections.  The prescription for treating both conditions is the same: diversify, have a financial plan, and understand market cycles.  Or it might be better to do nothing.  Supported by Nobel Prize-winning research (The Effect of Myopia and Loss Aversion on Risk Taking) is the finding that investors who monitored their portfolio most frequently, earned the least money.  Stay informed, stay disciplined and stay the course.

 [1] Wall Street Journal, July 18, 2024

[2] Data Source: Finhacker.cz

[3] Source: Dimensional

 Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. National Financial Network is not an affiliate or subsidiary of PAS or

Guardian. CA Insurance License Number - 0D23495. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results. S&P 500 Index is a market index generally considered representative of the stock market as a whole.

Opinions are those of the author and not necessarily those of Guardian or its subsidiaries.  

 2024-178599  Exp 7/2026