Investing FOMO is the hardest type of FOMO to conquer. FOMO stands for Fear Of Missing Out. The term is usually reserved for those who spend everything they have to buy the latest thing or experience without any regard for their financial future.

FOMO is what drives people to go into revolving credit card debt, making credit card hawkers rich, and their slaves poor. FOMO is the main reason why people are unhappy, even if they are living better than 99% of the world. Investing FOMO is when you chase an investment that has already risen by 1,000%.

Those who refuse to save for retirement justify their spending by saying, “you can’t take it with you.” It’s true. No matter how much gold you bury in your grave, your spirit takes nothing physical with it.

But after starting my investment tracker series, I’ve come to realize that investing may be the ultimate case of FOMO. Spending all your money on useless things doesn’t even come close. Let me explain why in three reasons. 

Unbelievably, the S&P 500 and the NASDAQ are at all-time highs in the middle of a pandemic. The billionaires have gotten super rich while millions of Americans are out of work. Here is a bull market checklist to living your best life today.

If you are an investor, your net worth is likely near or at an all-time high as well. As a result, we might as well use some of our gains to enjoy life more. Tomorrow is not guaranteed.

With the Fed now firmly on our side, investors have gained new confidence in taking on more risk. Valuations are crazy expensive, which means precaution is also a must. The last thing you want to do is give up all your gains and go back to the lows of March 2020.

I’d like to offer up some thoughts on how to invest and spend in a bull market to live a better life. Because goodness knows, the good times can’t last forever.

So you want to be an angel investor. If you are a regular person with no edge and no connections, I don’t think angel investing is worth the risk.

Let me share with you an angel investing example I had in a gin company back in 2010 and the outcome. Angel investing is the early stage of venture capital.

Angel Investing Is Difficult

After 10 years, my $60,000 investment in a private gin company finally paid dividends. Initially, given the company was sold for about $49M after expenses and I had invested in the company at a $10M post money valuation, I was thinking I had made a ~3X return ($180,000). Since over time shareholders get diluted with subsequent funding rounds, I thought that was a reasonable assumption.

Well it turns out I didn’t come close. Instead, here’s what I got:

Gross Proceeds: $98,425.88
Federal Withholdings: $0
State Withholdings: $6,523.82
Net Proceeds: $91,902.07

What the hell!? After almost 10 years, with $98,425.88 in gross proceeds, I only made a 64% return on my money (1.64X). Further, I had ZERO liquidity and lost hope for years that I’d ever get my $60,000 back.

Doing the math, I only made a 5.1% IRR, barely better than my guaranteed 4.1% 7-year CD that just expired.

So where did all the money go since the company was sold for 5X what I bought in for? Based on an internal document I received, we had to pay a lot of banker, lawyer, escrow, accounting, and general administration fees. We also had to pay severance packages to all the employees (rightfully so) who were made redundant when the parent company took over. But there must be something else I’m missing, which I’ll investigate further.

Got Away With A Close One

Despite the missing money, I consider myself LUCKY to get any money back because most startups fail miserably. Before the buyer announced the acquisition, I had already written off the $60,000 because shareholders had never gotten a dividend and the growth target dates kept on getting pushed out.

My concern was the company would turn into one of those zombie companies with just enough growth to maintain EBITDA break even, but never enough growth to become an attractive acquisition target.

When the purchase price was announced, my write-off expectation transformed into greed. And now with the payout, my greed has turned into selfish disappointment.

If you’re looking how to quantify risk tolerance and how to determine the appropriate exposure to stocks, you’ve come to the right place.

This post is also for someone who is wondering:

• Whether they have the proper asset allocation
• If there is a way to reduce investment stress while still benefitting from returns
• How to quantify their risk tolerance
• How to continue moving forward on their path to financial freedom despite all the uncertainty

One of my primary goals on Financial Samurai is to help readers build meaningful wealth in a risk-appropriate manner. You need to learn how to quantify risk tolerance before making the right amount of investments.

Because I started my career soon after the 1997 Asian Financial Crisis, I’ve experienced a lot of carnage as many international college students in the US had to drop out due to a sudden and massive devaluation of their respective home country’s currencies. I fully appreciate how hazardous the road to building great wealth can be.

Control Your Risk Exposure

Even the best-made plans can be laid to waste due to some unforeseen exogenous variable. We always hope for good surprises along the way. The coronavirus pandemic is certainly one of the biggest unforeseen black swan events in our lifetime.

Unfortunately, life always has a way of kicking us in the face after knocking us in the teeth. Let’s always be thankful for what we have and demonstrate kindness to those who are experiencing difficult times.

Most investors overestimate their risk tolerance, especially investors who’ve only been investing with significant capital since 2009. Once the losses start piling up, it’s not only the melancholy of losing money that starts getting to you, it’s the growing fear that your job might also be at risk.

The Richer You Are, The Harder You May Fall

You might also erroneously think that the richer you get, the higher your risk tolerance. After all, the more money you have, the bigger your buffer. This is a fallacy because the more money you have, the larger your potential loss. For most rational people, their lifestyles don’t inflate commensurately with their wealth. This is why even rich people can’t resist a free rubber chicken lunch.

Further, there will come a time when your investment returns have a larger impact on your net worth than your earnings. As a result, the richer you are, the more dismayed you will be to lose money. Your main hope for recovery is a rebound in investment performance because your work earnings won’t contribute much at all.

Well, we’ve done it, folks! Despite COVID-19 and tens of millions of Americans unemployed, the NASDAQ successfully completed its V-shaped recovery and the S&P 500 isn’t too far behind.

In this post, I want to go through some key lessons from this most extraordinary and largely unexpected rebound. We are firmly back to bull markets, despite the economy still in ruins.

I’m not buying into this rally, but I continue to hold my pre-pandemic stock positions with wonderment and bewilderment.

As always, the goal is for all of us to become better investors in order to achieve financial freedom sooner, rather than later.

Despite not wanting to buy stocks after the S&P 500 has rebounded by over 30% since its March 2020 bottom, I still own a significant amount of stocks across a number of investment portfolios: two 529 plans, a SEP IRA, a Rollover IRA, a Solo 401(k) and a couple taxable investment accounts. Then there’s my wife’s SEP IRA, Rollover IRA, and two taxable investment accounts that own mostly stocks as well.

One would think that if I didn’t want to buy stocks after a rebound, I should also be willing to sell stocks that I already own. I do want to sell and I have sold plenty in my accounts in order to de-risk, but I’ve held off on selling stocks in most of my tax-advantageous accounts due to a variety of reasons I’ll talk about in this post.

To be clear, I’m not advocating buying after a huge rebound. I’m going to explain in 12 reasons why I haven’t gone to 100% cash or short-term Treasury bonds across all my portfolios. Everybody is at a different stage in their financial journey. Nobody knows for certain what the stock market will do, so please keep an open mind when reading. This post should help explain why so many people keep buying, despite all the destruction.

Starting on May 1, 2020, my main focus has been to get as smart and as financially prepared about real estate as possible.

In May, I have:

• Gotten preapproved for a mortgage to give myself more firepower to take advantage of any deals.

• Analyzed all the closing costs for buying a home with cash and with using a mortgage so I can make a truer offer.

• Gone through the process of understanding whether using a real estate attorney is worth it or not to cover my bases.

I believe the easy money in stocks has already been made after a 25%+ rebound. Therefore, I’ve moved on to focusing on new opportunities in real estate. I’m always trying to think ahead, not behind.

After publishing my real estate attorney post, I got this comment from a reader:

Hi Sam,

I really like your blog and appreciate your clear thinking, concise writing, and wealth of knowledge. However, I’m a bit disappointed that since March 18 you haven‘t been covering the stock market and I am missing your help on interpreting the irrational developments there.

The question of “Do I need a real estate attorney?” pales in comparison to “How on earth can the stock market rally in face of the greatest recession since 1929?” I would really appreciate your wisdom here.

Thanks Sam!

– Tom

My first thought was how selfish I was to write mostly about real estate in May. Given I own Financial Samurai, I should write more about what other people want, not only about what I want.

My second thought was how I failed to properly communicate my thoughts on the stock market during this time of crisis. After publishing How To Predict A Stock Market Bottom Like Nostradamus on March 18, Tom thinks I’ve been radio silent.

A good teacher is only as good as the student who needs the most help in his or her classroom. I believe in leaving no one behind during this time period. Therefore, I have let down Tom and others who feel the same way.

To make things right, let me share my crystal clear thoughts on the stock market after a huge rebound.

The yield curve inverted in 2019 and the recession is now here in 2020. Although stocks have rebounded aggressively since its March 2020 low, the economy is still in a precarious state. Due to investor psychology, the S&P 500 generally goes up like an escalator and goes down like an elevator. Let’s look at the average daily percent move of the stock market.

If we’re long-term investors, it’s a good idea to understand how much the stock market moves a day on average. When stock market volatility spikes, we’ll feel more calm and reduce our chances of doing something irrational.

The Average Daily Percent Move In The Stock Market

Below is a fantastic chart that shows the daily percentage movement of the S&P 500 over the last 10 years. Each dot represents one day.

As you can tell from the chart, the average daily move in the stock market is between -1% and +1%. The S&P 500 represents the stock market.

Therefore, if you are a long-term investor in the capital accumulation phase, you should consider buying more than your normal investing cadence when the S&P 500 is down greater than 1%.

If you’re in capital preservation mode, you might consider selling some of your S&P 500 index position when the S&P 500 is up greater than 1%.

Of course, nobody knows the future. Trying to beat the S&P 500 over the long run through market timing is unlikely to work.

However, we’re not trying to outperform the S&P 500. What we’re trying to do is figure out how to best invest our cash flow, or larger-than-normal cash injections, during the capital accumulation phase and vice versa.

Here’s another historical average daily percent change chart for good measure.