(An audio version of this blog post is available on SoundCloud)
A no regrets decision is a high quality decision. When backed by a systematic framework, preferably something like the decision chain which I use in my consulting practice, a decisionmaker has reasonably and practically exhausted all available options to improve the inputs to the decision process. Since the quality of the decision comes from the process and not the outcome, a decisionmaker experiences no regrets and is mentally and emotionally prepared to take steps to adapt to whatever the decision produces.
The stock market delivers outcomes every trading day – watch too closely and they can overwhelm. Long-term investors overcome this information overload by committing small and regular amounts of money to diversified portfolios that are theoretically robust over time. Yet, when the stock market’s on-going outcomes are surprisingly strong, the fear of missing out, better known as FOMO, can lure a trader or an investor away from their discipline. This loss of discipline can drive an over-commitment of capital just as the market gets extremely expensive from a fundamental standpoint and/or overbought from a technical standpoint. However, there is a way to change from FOMO to a no regrets strategy for investing or trading in the stock market.
The ‘no regrets’ approach, in this trading and investing context, refers to a strategy where an investor buys a small position in a stock or index such that any potential loss from a market sell-off will not significantly impact their financial well-being. This trading and investing approach also leaves investors with cash ready to deploy into buying more shares when the market becomes less expensive and/or completes its overbought trading period. If such a “buy-the-dip” opportunity somehow never materializes, the no regrets position provides some participation in the extended gains.
1. Understanding FOMO
FOMO comes from failing to participate in surprisingly profitable price action in the stock market. Watching others enjoy and celebrate these gains creates an overwhelming fear of getting left further and further behind. This fear is the cousin of greed, but the FOMO cousin grouses along the walls while everyone else dances giddily in the spotlight of the center of the room. FOMO can become intense enough to drive investors to make impulsive purchases without adequately considering the risks (like heading into the stock market’s most dangerous months for drawdowns).
To overcome FOMO, it is critical to first acknowledge its presence and then consciously implement strategies to mitigate its effects.
2. Embracing the ‘No Regrets’ Approach
A ‘no regrets’ approach is a protective trading and investing strategy designed to preserve an investor’s capital while also leaving room for potential gains. Here are the key components of this approach:
Small Positions: Instead of making substantial investments based on market hype, the ‘no regrets’ strategy involves purchasing smaller positions in a stock or index. This can insulate a portfolio from severe losses in the event of a market downturn that churns FOMO into its evil twin called panic. If the price action continues to work favorably, the small position offers up a trophy of success in the form of profit participation.
Position Alignment: Every trader and investor must have a long-term strategy at the core of their portfolio. Staying aligned with that long-term approach provides the foundation for changing FOMO to no regrets: the long-term portfolio is itself a no regrets position because it is robust to the short-term hype that fuels FOMO.
Cash Reserves: The ‘no regrets’ strategy also underscores the importance of maintaining cash reserves. By doing so, the end of FOMO can become the beginning of new, and presumably better priced, opportunities.
3. Execution of the ‘No Regrets’ Approach
The execution of a ‘no regrets’ approach involves a combination of patience, discipline, and quality decision making.
Taking small positions allows for flexibility to increase the investment if it aligns with the foundational longer-term portfolio or to comfortably take a loss in a more speculative (short-term) trade. A cash reserve either enables buying more at lower prices or provides a comforting cushion against the blow of the loss. Either way, the loss must leave no material impact to the portfolio or to financial health.
Let’s use numbers for an example scenario.
An investor must assess their risk tolerance relative to the perceived volatility in the market. For example, if the FOMO is about a stock market index, consider the impact of the current market hype receding into a 20% decline in price. If the FOMO is about a stock, consider the impact of a 40% (short-term) correction or some similarly devastating loss back to a previously important price level. For short-term trades, use a tight stop loss below a key technical level or more generally after an 8% pullback. In other words, define ahead of time what it means for the trading thesis to fail and take the loss quickly at that point. Remember, the position is small enough such that taking action leaves no regrets! The action aligns with prior preparation and quality decision making.
“Small enough” is some share of capital allocated to the investment or trade. Given the FOMO, the share must be small because FOMO usually builds as risks in the stock market rise simultaneously. This share is small enough such that losses leave no material impact on financial health, but it is big enough to offer enough potential profit to quiet the FOMO.
If 5% of $10,000 in available capital represents an absolute maximum tolerable loss, then $500 (.05 x 10,000) is the maximum available to the no regrets position. A 20% correction in an index generates a tolerable $100 (.20 x 500) loss. A 40% collapse in a stock generates a tolerable $200 (.40 x 500) loss. From this point, an investor still has financial (and mental!) capital to deploy into the index or stock if the long-term thesis remains intact and still aligns with the foundational long-term portfolio. A short-term trader should have much smaller tolerable loss levels in order to leave more capital available for fresh (short-term) trading opportunities.
Note well that while this trading and investing approach can mitigate the potential impact of losses, it does not eliminate the risks inherent in investing and trading. Every investor and trader must face the possibility of loss. This approach also cannot guarantee gains.
4. Reaping the Benefits of a ‘No Regrets’ Strategy
A well-executed no regrets strategy can offer several benefits. It can help protect a portfolio from over-committing capital in an expensive or over-extended stock market, provide opportunities to capitalize on market volatility, and perhaps most importantly, foster a disciplined approach to minimize or even eliminate FOMO. Replacing FOMO with a no regrets strategy reduces impulsive decisions; it is like a vaccination against the hype cycle underlying the FOMO.
Of course, profits are the best benefit from the no regrets strategy. With the FOMO satisfied by the small position, a profit locks in the satisfaction from having participated. Thus, an investor or trader must develop a notion for how long to ride the position higher. That profit point greatly depends on the context of the trading environment. Short-term traders should target taking at least half of profits once the paper profits have reached 2 or 3 times the potential tolerable loss (see the earlier example).
5. Considering the Context
The CNBC video below provides a great example of the importance of context for FOMO. On June 12, 2023 conditions were building for what Todd Sohn at Strategas Securities called a building tidal wave of FOMO. That FOMO presumably started at the beginning of June. The S&P 500 (SPY) pulled off a second and even more important breakout the day of the CNBC interview as the market moved closer to overbought levels. After failing to break through to overbought, the index held its last breakout point as support. That milestone flashed the green light confirming that FOMO would continue to build in the stock market. I called this period the “summer of loving stocks.”
5. Conclusion
A ‘no regrets’ strategy in the stock market encourages disciplined investing and trading while allowing for some speculation. The strategy counteracts the emotional pitfalls of FOMO that comes from watching others speculate successfully.
However, like all strategies, success depends largely on a commitment to diligent implementation. Here at One-Twenty Two, I follow market breadth to define the extremes of trader and investor sentiment. The related indicator, the percentage of stocks trading above their respective 50-day moving averages (DMAs), also known as AT50, has helped me promote “no regrets” over FOMO.
Be careful out there!
Full disclosure: no positions
Old Friend, I really enjoyed your FOMO article as it is what we both use. Cheers! Relax and enjoy your excellent Wisdom! Now get back to the job at hand.
Hey Richard! Wow – long time. Thanks for reading and checking in.
I use No Regrets frequently as well. However, I often encounter the following situation: I enter a GTC order to buy the no-regrets position at a recently-supported price. The target never touches that price again, instead running away to much higher prices. I steadfastly resist just blindly entering a market buy order for it – that would be FOMO! – but don’t know what to use as a new price target.
Anyone have a solution that has worked well for them?
I advise hitting the reset button. Reduce the size of the position and pay the slightly higher price required to get into the position.