FOMO and FOOP, what the #$%@?
Fear. It is responsible for all sorts of poor decisions and has been a factor in driving the housing market upwards for some time now. That is, the fear of missing out (FOMO). Now buyers have a case of FOOP, that is the fear of overpaying. Property investors have a fear of having to top up their mortgage payments due to the new interest deductibility rules.
So how does fear lead to making poor decisions, both when you buy and sell? We observe what each other are doing. We listen to what each other says and we are concerned about what other people think of us. We also fear change. So, when someone you know and trust says I just made $50,000 buying crypto, or a house, or sharesies, it can be hard to resist. We tend to go into a state of anxiety (without knowing it) that causes us to buy based on the recommendation or popular belief from someone because it is the “it thing” to do. Often, when I have asked people why they purchased Cryto/Sharesies or property I get a variety of responses. These include “the returns have been awesome” and “I just thought it could be fun” I’ve also heard “a lot of my mates are doing it”, “my uncle/auntie/friend told me they have done well” and “I need to make a lot of money so I can buy a house”
The thing is, returns are historical and may not be repeated for a single asset. Fun should never be part of an investment strategy and your auntie/uncle/friend, despite having done immense google research, aren’t likely to know what they are talking about. In fact, they could be setting you up for a massive failure.
So here are some helpful tips for you to go through before you make your next investment or any purchase for that matter:
- What is the value based on? This is particularly relevant to Crypto currencies. How anyone is determining a value for them baffles me. There is no underlying income stream, no asset base (assets that can be sold to repay investors). A normal currency like the New Zealand dollar is based on the GDP (Gross Domestic Product that measure production income and expenditure of a country) and other economic indicators. This is what the New Zealand government has decided to use as our currency.
- What are you trying to achieve? What are your goals? And how does this purchase/investment help you achieve these goals? How would a substantial decline in the investment affect your ability to achieve these goals?
- What do you understand about the risks? Are you diversified? Diversification does not mean you own two properties or cryptos.
- What do you understand about the investment? What does the person that made the recommendation know about finances?
Fear also plays a major role in selling assets. Those that have bought on fear are highly likely to sell on fear. Which generally translates into overpaying and then selling at a discount and losing money. It is my suggestion that before selling, take a breath, ask yourself why you are selling. Is it part of your overall plan? A well-diversified portfolio of investments generally performs well over the long term. But on a week by week basis it can be a roller coaster ride. Same can be said for property. However, not to the same degree.
Investing should involve taking a structured and disciplined approach to help you achieve your goals. The important step is identifying what those goals are. Emotions should be set aside, which is difficult to do when businesses use emotive marketing to try and get you to buy or sell something for their gain.
The fear of missing out or not being trendy seem to play such a major role in decision making. Yet the fear of not having enough in retirement, to have choices doesn’t seem to light a fire in people until it’s too late.
So, get to it. Don’t go ask your aunty or uncle or the Uber driver for advice. Speak to a qualified financial adviser. Talk to us, we want to help you.
Here is the latest monthly insights from Tony Alexander:
Inflation and interest rates on the way up
The numerous factors pointing towards higher inflation and higher interest rates over the next two years have strengthened this past month, to the point where it looks like the official cash rate will peak above 3.0% rather than 2.5%.
It is not just that the inflation rate is already 4.9% and headed towards 6%. Analysis overseas tells us that the supply chain and shipping problems which have pushed inflation up so far will continue through 2022 into 2023. This is reinforced by China continuing to follow a Covid eradication strategy which can lead to sudden closures of factories, cities, and ports.
There is also going to be more inflation coming from the labour market than previously anticipated. New Zealand’s unemployment rate has fallen to a record low of 3.4% and it is highly likely that the pace of wages growth will rise a lot more than the so far mild increase which has been recorded. This will be assisted by the coming loss of many people to Australia to take advantage of higher wages, lower house prices, and a lower cost of living.
There is also upward pressure on inflation and interest rates coming from additional easing of fiscal policy being done by the government, with a low probability that tightening will be pursued ahead of the 2023 general election.
Already fixed mortgage rates have risen by between 1.3% and 1.8%. Further increases are highly likely and for most borrowers this means switching from fixing one-year towards longer terms will be the optimal thing to do. This is why for so long last year and this year I was a fan of forsaking the low one-year rates on offer and locking in fixed for five years at 2.99% or thereabouts. Five-year fixing now costs almost 5%.
For additional information on the economy, housing market, and interest rates, you can subscribe to Tony’s free weekly Tony’s View publication at www.tonyalexander.nz
Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor. This is where I need to say past returns are no guarantee of future returns.
- Posted by Isbister
- On November 15, 2021