No one likes losing money, but hearing about others getting rich in an investment you have no exposure to is simply unbearable, making the fear of missing out (fomo) more painful for many than anything else.
This is a fear that builds and builds until the un-invested can’t stand it any longer, jumping in and creating a final, parabolic move higher.
Over the past year, we’ve seen this play out time and again, from crypto assets to the GameStop saga to SPACs and IPOs – chasing has never been more in vogue.
The fund industry is prone to the same investor behavior, with winners lionized and unsustainably high returns bought after-the-fact on the expectation of similar gains continuing in the future.
There’s no group of funds that embodies this principle today more than ARK Investments.
Led by their flagship Innovation ETF ($ARKK) and its largest holding in Tesla, ARK has seen a 14x increase in active ETF assets over the past year, from $3.6 billion to $55.7 billion.
Why are investors rushing in?
Chasing incredible past performance (+153% return in 2020 for $ARKK) in fear of missing out on similar gains in the future.
I spoke to one of these investors this week who told me he just “went all-in” on $ARKK because “even if they return half what they did last year that would be multiples better than anyone else.”
Needless to say, a worst-case scenario of +75% is unbelievably high, and exactly the kind of unrealistic assumption that comes when FOMO reaches a tipping point.
Will many of these new investors stick around when the inevitable drawdown and reversion to the mean occurs? History says the odds are low. Most will move on to the next hot investment of the day, driven once more by the greatest fear of all: missing out.
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