According to a new study, curbing FOMO can help prevent people from feeling like they missed the stock-market bottom.
Although investors might be driving stock-market gains due to fear of missing out, it’s usually not the case that they’re overly concerned about the “bottom” of the market. In a note on Tuesday, a strategist noted that investors might be overreacting to a potential technical issue.
According to Dan Suzuki, a financial advisor at Richard Bernstein, many investors tend to chase the bottom of the market by buying early. However, history shows that it’s better to be late than early.
Despite the recent market gains, the S&P 500 is still in a bear market. It’s down more than 17% from its June 16 high of 3666.77, and it’s close to 10% below its January 3 record close of 4796.56. The large-cap index managed to close at its highest level in four weeks on Tuesday as it tested its 200-day moving average.
The broad rally that’s been happening over the past couple of weeks has attracted some investors who might be looking to catch up to the losses from the previous year. The S&P 500 is expected to open lower on Wednesday.
According to Jason Draho, a financial advisor at UBS, the improvement in investor sentiment over the past couple of weeks has prompted him to talk about a Goldilocks scenario. He noted that although the market is still in a bear market, sentiment is starting to improve.
Despite the improving sentiment, Draho noted that the market might still be vulnerable to negative news due to the current state of uncertainty.
Although the market’s performance during the past couple of weeks has been impressive, it’s still not clear if the bottom was reached in June. According to Suzuki, historical data shows that being at the bottom isn’t as important as it might seem.
In a previous analysis, we looked at the returns that investors would have gotten from investing in the market for the full 18-month period following the market’s bottom. We then divided the hypothetical returns into two categories: those who held 100% of stocks for six months and those who shifted to 100% after one year.
This strategy can improve returns while reducing downside potential. It also gives investors another opportunity to analyze the incoming fundamental data. “If it’s not based on fundamentals, it’s just guessing,” Suzuki added.
According to Suzuki, there have been only three instances in the past 70 years when it was better to be early than late. In each case, the Federal Reserve had already started to reduce interest rates. Given the current state of uncertainty, it’s not surprising that investors would be reluctant to increase their equity exposure.