A lot of traders are itching for a nice big market rally, especially one that lasts for more than a day. If you’re one of them, be careful, or you could easily let FOMO (fear of missing out) ruin your portfolio.
How did you fare during the rally on December 26? The Dow Industrials vaulted higher by over 1,000 points after dropping some 600 points on Christmas Eve. Even as the markets moved higher following that amazing record-breaking day, the bear market is still alive, and the desire to participate is strong, especially for those looking for bargains.
Let’s be honest: In a bear market anything that looks cheap can get even cheaper. Just look at how the market destroyed Apple last week on massive turnover. The stock lost over $250 billion in value, a 33% drop from its all-time highs. Any stock can go from bad to worse. What was a bargain can quickly turn into a disastrous investment.
How to manage FOMO
You can manage FOMO through discipline. If you cannot muster the self-control to wait, FOMO will be a problem. And listen, I know this is hard to do! We are herd animals, and when there is some pleasure or reward associated with the herd, we want to be at the party. Now, more than ever, you have to consider the timing of the trade rather than the desire to be in common company.
Rallies will do their best to suck you in. Bear markets have the biggest and most spectacular rallies. Because volatility is so elevated, it can slam down very hard.
The VIX was over 36 on Christmas Eve! The markets were more oversold than they had been since the global financial crisis over ten years ago. On December 26, sellers were exhausted. No one was left but the dip buyers. Many traders tagged along and went for a ride up in record style, but some of that move was already wiped out last week. Those who didn’t sell were left holding the bag – like the Apple buyers (Apple went up sharply on the 26th, too).
Perhaps the action on December 26 was a false start, a one-off trading day. Perhaps it will be the start of a new bull run. It’s not easy being patient and waiting. However, the timing of entering a trade is so critical that you must exercise every ounce of discipline you can muster. Your portfolio will thank you.