By David Koch, CFP®, AIF®, CFA, Senior Wealth Advisor
I introduced FOLÉ (pronounced “foh-lay”), the Fear Of Losing Everything, in my last blog. As I discussed there, FOLÉ can exert an extremely powerful force on those who have a lot to lose. I also introduced the concept of locus of control: How we view our relative capacity to direct the critical outcomes that play out in our lives.
When investors are tested by difficult market environments, FOLÉ can be the dark driver of calamitous departures from a disciplined buy-and-hold strategy. Understanding FOLÉ and its impacts can help.
A volatile mix: Perceived loss of control and the potential to lose everything
Children’s lives are dictated mostly by their parents; they tend to have more of an external locus of control than most adults. For kids, from food choices to how they spend their time, pretty much everything is orchestrated by their guardians; they are not their own key decision makers. As we get older, we tend have more control. We get a driver’s license, we move out, we get a job, so our locus of control shifts to being more internal.
For some, beyond middle age, this locus of control can shift back to the more external side of the spectrum. We feel like we lose our ability to control our own lives again. Factors might include not working any more, moving into a nursing home, losing that driver’s license.
These feelings, combined with the accumulation of wealth and assets, can result in the enhanced belief that there is more to lose now than ever. This combination of having more to lose with the perception of having less control of our destiny is what can give rise to a dangerous case of FOLÉ.
The elevator down and the stairs back up
There’s a saying that the market takes the elevator down, and the stairs back up. You can see this in the numbers and in the charts. People are buying, buying, buying and then there’s an event, some sort of catalyst, and selling behavior begins. Prices drop as people are willing to accept lower and lower prices just to get out. More and more people sell, and the market corrects down. This is FOLÉ taking hold.
Many individuals stick to trading large, very liquid stocks like Apple and Facebook on large, deep brokerage platforms like Fidelity and Schwab. But remember, it’s still a trade! When you place a buy order, you’re not actually buying stock from Fidelity or whomever you trade with. You’re buying that stock from someone else who is looking to sell, and your broker is matching the trades.
What that means is, when the market is falling and you put in a sell order, your broker is looking for someone who is willing to buy that stock at that moment. This mechanism also drives prices down sharply.
Remember, when you’re placing a trade in a falling market: In order for you to escape a burning building, you need to find someone to take your place inside.
Unfortunately, when FOLÉ sets in, people don’t care what the price is. It can take a tremendous amount of discipline to weather that impulse to flee. Not to compare us to doctors, but for the same reasons surgeons don’t operate on family members, money is often too emotional for people to rationally handle their own. Some people may have nerves of steel, but many hire professionals like us. Don’t let FOMO and FOLÉ drive your investment strategy, you’ll sleep better at night.
Disclaimer:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. There is no guarantee any forward-looking statement will come to pass. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index.
