FOMO
FOMOOOOOOOOOOOOOOOO
What does this word mean?
Today we're going to explain a term that you surely read often, but that also has a deep meaning in the psychology of every trader.
FOMO means fear of missing out, and we could translate it as fear of having missed an opportunity, sometimes unrepeatable.
We can also see it as a social anxiety for having missed an interesting and very profitable investment train.
Fomo is one of the many biases working against you.
This feeling that you will feel deep inside will be a mixture of discouragement, anger towards yourself and frenzy to jump on the market without ifs and buts, without thinking and without having any regard to money management.
It's a feeling that is present especially now in the social media era, thank to the continuous updating of what other people are doing, the lifestyle that the social media of certain characters are selling us and their wealth.
You see on twitter and instagram unknown kids becoming millionaires overnight, driving around Dubai sitting in bentleys and surrounded by fabulous models, all accompanied by articles and pictures of their bank accounts at various zeroes.
And you're in your bedroom, in your underwear, guzzling a cola. It's obvious that you want to do what they do and have their lifestyle.
However, this emotion of envy you're feeling leads you to follow some advice that could be bad for your wallet.
Right now you're susceptible to those articles in blogs with titles like "the 5 coins you can't not have in your portfolio" or "XX's untameable growth" or "expected 200% return with YY".
To which we have to add all the messages that you read in the various chats, which promote things never heard that in most cases are scams.
And then you enter in the optics that "now or never" on some unknown coin, you buy it exaggerating and you throw away all your past gains.
You don't have to do that, it's not a competition and you don't have to buy things that in a normal situation you would have never bought.
And on top of that you are left with the anger of having thrown money away and you can only take it out on yourself.
This is why we talk so often about managing emotions and anxiety.
If you had stopped to think, none of this would have happened or you would have allocated a much smaller amount.
You've gone overboard with your level of risk
Now let's face it, social media are fake.
They are a mirror of what we would like to be and that we somehow make others see. But that we are not.
When we see these millionaire kids, their success is exaggerated to sell you one of their products.
Most of the successes of those we follow on social are exaggerated narratives.
The cars, jewelry and private planes are definitely rentals and the incredible models are only friends of their cousin or prostitutes.
None of these champions talk about their mistakes and losses but all they talk about are the victories and the fantastic billions they are making. Some even get paid to foment fomo or to sell scams or useless courses or useless books.
Now back to us, generally the rule to earn is buy low and sell high, which is very logical but in most cases if a stock is low, mentally evaluate the situation as negative, if it is high it is positive and you think it will go up again.
This is possible, but what if the uptrend is over?
If everyone is rushing to buy Ethereum after a 200 percent rise, you are compromising your risk level just because you are following the crowd, you are following the hype.
And the hype is the enemy
You're acting on the urgency to do something and that's not good because as you know deep down, returns are not guaranteed.
The fomo, the frenzy doesn't make you think rationally and doesn't deepen what you're putting your money on.
If you get caught up in the frenzy to buy after you've seen a post on some social, stop for a moment and think
who is making the post on social networks? Is he a serious and reliable person, is he an idiot?
Is he someone who knows something about it or is he a bum with no experience at all?
These questions can stop you from making some careless purchases.
And always remember that limited time windows in most cases hide nasty surprises.
I don't doubt that some of the axles being touted could be the new Tesla, but being cautious is always best.
You might feel like an idiot for missing an opportunity or will you be an idiot for losing all your money?
Keep calm and study.
The rise in interest rates. Maybe.
Today we're going to talk about interest rates.
At this moment in history, interest rates are at their lowest, they have never been lower.
By logic, something that goes down has to come back up, so what would happen in theory if interest rates were to go up again?
Let's start putting the pieces in order.
Central banks of nation around the world have various tasks and one of them is to stabilize economic activity and promote the prosperity of their own nation within the global economic competition.
One of the central bank's weapons is the control of interest rates, rates at which major banks lend money to smaller banks in what is called the overnight market.
This money will then be lent to other economic entities such as companies and individuals like yourself, at higher rates of course.
This flow of money allows companies to finance themselves and grow, people to buy a house by accessing a mortgage and small banks to be remunerated for lending money. The money so switch on the 'economy, creating value and wealth.
In the U.S. for example, and in this case for their central bank the Fed, the interest rate that banks charge in these cases during overnight loans is called the Federal Funds Rate.
This is the rate you hear about when the media talk about rising rates on the various economic news programs.
As you can see these rates definitely have an impact on the companies and people around you.
These rates affect the lives of the people and they are the underlying of any loan from any bank.
They affect mortgages, lines of credit and even bonds.
They are an important metric to monitor and keep an eye on in an advanced economy such as the West.
In fact, in the 2008 economic crisis, the Fed lowered interest rates significantly to help the overall economy recover.
So lower rates for banks are reflected in lower rates for businesses and people.
Companies have lower costs for a certain period of time and allows to have more employees, who have a salary and then expenses, so they boost the economy.
As you can see is a phenomenon that we could call circular.
Now, logically, in the event of rising rates any person with any debt will spend more for their debt and in the case of a company we would have higher business expenses and necessary cuts to be made to possible staff.
Now, read in this way, it seems that the solution to all the ills of business is to keep rates at rock bottom levels, but it should be noted that central banks must try to keep the economy sustainable, avoiding to depress it with high rates or set it on fire with the printing of money.
A system overexcited by unlimited money printing and low rates creates problems in the long and medium term.
An economy with a strong growth momentum, we will see a large demand for goods and services from citizen users.
Since the production of goods and services cannot be increased overnight and more people employed means more money spent in the market, this will result in a price increase called inflation.
If we want to explain inflation in a simplistic way, it is as if the value of money decreases or even collapses, decreasing economic well-being and eroding household savings.
We actually experience some inflation every year as central banks try to have an inflation level of 2% per year.
Understand that 2% per year is bearable, a 100% per year or per month is destructive.
So, understanding this risk, by raising interest rates and making loans more expensive, they are trying to cool down the economy, trying to balance it as best they can and lower inflation
Obviously there are short-term costs, but better than having an inflation like the Venezuelan one.
In fact, in the event of a rate hike, the effects will be felt by investors and consumers alike.
Consumer debts will become more expensive, such as home and car loans for variable rates while fixed rates will remain the same.
For investors, usually when rates rise the stock market sees a weaker performance.
This is because high rates make the operations of companies more expensive, more costs less revenues and therefore lower expectations in the stock market.
Bond prices will probably fall as new issues will have higher yields and will be more attractive and also the yields of deposit accounts will grow.
This leads us to be particularly careful how we expose ourselves to debt, teaching us another parameter to keep an eye on.
BONDS: the debt used to invest.
Why do bonds exist? How are they made?
Let's start from the beginning.
To grow a company, This company needs money and investments in itself and very often it happens that this financial need cannot be solved only through the cash created by sales. It therefore becomes necessary to access to loans.
The company may decide to turn to a bank or to the investing public, issuing debt in the form of bonds, so how do bonds works?
I give the money to the company and the company pays me annual interest on the amount until the bond matures.
Upon expiry of the bond, the company gives me back the value of the bond when I bought it.
The duration of the bonds varies, it is still a long-term investment that lasts years, from 5 to 30 years depending on the type of bond.
The return on a bond is varied and depends on the different areas and risks that are taken.
It may happen that the company goes into default and no money is returned to you.
In the event of an increase in risk, you are generally not obliged to keep the bond in your portfolio but you can also sell it on the market. This is also true if the bond has risen in price, you can take home a good profit.
Companies have less risk of default than individuals and the bonds considered safer are governative bonds.
Governments also issue debt to pay their expenses, and they do so by issuing bonds of different types, duration and yields.
Government bonds pay little but are considered risk-free because governments are not supposed to go bankrupt.
In theory, and then countries can always raise taxes to avoid default.
In case of default, however, the bonds are not all the same, in fact we have something called seniority ranking.
In the event of bankruptcy, the oldest bonds will be paid first by the liquidators.
The second safest category on the market are corporate bonds, of large stable national or multinational companies that are considered safe but are still companies that can fail, so these must pay higher annual returns to be attractive on the market.
The third category is High Yield Bonds, also called junk or very high risk bonds.
Some important things to keep in mind when buying bonds.
Bonds can be sold on the market, check the market value as it fluctuates based on previous and subsequent issues.
Newer bonds generally pay higher annual interest.
However, lower interest on newly issued bonds make older bonds with higher interest more attractive.
There are also bonds with negative value in terms of yield.
Always pay attention to the issuer's credit risk, if it increases or decreases because this affects the value of the bond but also the risk to which you expose yourself on the market.