On November 26, it was announced the Dow set its 100th record high under the Trump administration leadership. News like this helps fuel the excitement about gains made in the stock market and anticipated gains in the future. With investments climbing higher and higher, it is easy to get caught up in the emotion called the fear of missing out.
Stock market excitement often emboldens advisers and their clients to discard many of their previously held guardrails of protection in client portfolios to participate in higher returns.
In the 1990’s the stock market just kept going higher and higher. I was fired in 1998 by a client because his portfolio only returned 32% and he was upset. His 401(k) account was invested in technology mutual funds and it returned 50% over the same period. I tried to explain the importance of diversification and risk management, but he didn’t care. The fear of missing out removed all protection in his 401k because of the allure of higher returns. Two years later when the recession hit, he lost half his portfolio and he was only two years away from retirement. His long-anticipated dream of what retirement would look like totally changed.
The underperformance of a portfolio that accompanies certain risk-managing measures, is the price we pay to avoid out-and-out ruin in the long-term. This is especially true for those closer to retirement and those already in retirement.