Don’t let FOMO leave you fatally exposed to market volatility

Kim Hak-kyun

The author is the head of the research center at Shinyoung Securities.

A flood of new money has poured into Korea’s stock market this year. Through Monday, net inflows reached 129 trillion won ($84.9 billion), easily surpassing the previous record of 75 trillion won set in 2021 during the so-called Donghak Ant Movement (a retail-investor buying campaign named after the 19th-century Donghak Peasant Movement) investment boom, and doing so in less than half a year.

Investing, whether in stocks or any other asset, is ultimately a game of buying low and selling high. Yet every investment boom begins only after prices have already risen significantly. This year is no exception. More than 59 trillion won entered the market after May alone, when the Kospi climbed above 7,000. By contrast, only about 14 trillion won flowed into the market last year when the index remained between 2,000 and 4,000.

Rapidly rising asset prices act like a powerful magnet, drawing in even more money. As prices continue to rise, investors become susceptible to what behavioral economists call the recency effect — the tendency to believe that what is happening now will continue indefinitely. Add to that the anxiety of watching others make money while standing on the sidelines, commonly known as FOMO, or the fear of missing out, and the surge of liquidity following a market rally becomes easier to understand.

History offers many examples. Korea experienced the Buy Korea Fund craze in 1999. Stock funds became wildly popular in 2006 and 2007 as the Kospi first crossed 2,000. The retail-investor boom of 2021 followed a similar pattern. Today, with the Kospi hovering around 8,000, investors once again find themselves in familiar territory.

Many entering the market undoubtedly have their own investment logic and expectations. Still, investors who join only after the index has repeatedly set record highs should be cautious about overestimating their forecasting ability. Those who remained inactive while the market climbed from 2,000 to 6,000 are unlikely to have suddenly acquired extraordinary predictive powers simply because they decided to invest at 7,000 or higher.

No one can identify the perfect moment to invest. Stock investing is inherently an exercise in confronting uncertainty. Predicting market tops and bottoms with precision is nearly impossible. What history does show, however, is that the Kospi has trended upward over the long run despite repeated crises and setbacks. Since 2000, the index has never posted declines for two consecutive years.

Long-term performance also compares favorably with that of the United States. The Kospi was launched at 100 points on Jan. 4, 1980. At the time, the S&P 500 stood at 107. As of Wednesday, the Kospi had risen to 7,730, a gain of roughly 77 times, while the S&P 500 had increased about 67 times to 7,267. Although much of Korea’s recent outperformance has occurred over the past year, the long-term returns of the two markets were broadly comparable until 2018.

The lesson is clear. Even investors who enter the market at unfavorable prices may ultimately be rewarded if they remain patient. Investing is not only about timing trades correctly. It is also about endurance — the ability to withstand market turbulence for extended periods.

The path upward has never been smooth. Long-term bull markets often contain sharp corrections that defy conventional expectations. One of the best examples is Black Monday in October 1987, when the Dow Jones Industrial Average plunged 22.6 percent in a single day. Neither the Great Depression, the 2008 global financial crisis nor the Covid-19 pandemic produced a larger one-day decline.

Analysts pointed to rising interest rates, America’s twin deficits and program trading as possible explanations. Yet the more important story was what happened afterward. Despite the panic, the United States stock market quickly recovered and resumed its upward trajectory. What seemed like a world-ending catastrophe eventually became a small scar on a long-term chart.

The lesson of Black Monday is that investors should not make a game of predicting short-term volatility. Long-term optimism does not imply an ability to forecast every market swing. Stock prices may reflect corporate value over time, but in the short run they are shaped by constantly shifting emotions of fear and greed. As a result, short-term movements are often largely random.

Investors should therefore focus less on volatility itself and more on their ability to survive it. The greatest danger is being structured in a way that leaves one vulnerable to a sudden shock. Leverage is the clearest example. Investors who arrive late to a rally often become impatient and borrow to amplify returns. Leverage increases gains, but it magnifies losses as well.

Recently, single-stock leveraged exchange-traded funds tracking twice the daily movement of Samsung Electronics and SK hynix were introduced. Such products combine leverage with concentration risk. Calling them funds while effectively encouraging highly concentrated bets seems contradictory.

In investing, the most important goal is not hitting a jackpot but staying in the game. Those who constantly chase extraordinary returns often end up suffering extraordinary losses. Investors who remain in the market long enough may eventually encounter exceptional opportunities. The stock market rewards patience, but only those who survive can enjoy that reward. Avoiding a fatal mistake is the first principle of investing. It may also be the last.