Fear of Missing

"Ever wonder why fund managers can't beat the S&P 500? Because they're sheep. And sheep get slaughtered."
--Gordon Gekko (Wall Street)

Which is worse for a money manager?

a) 100% invested in stocks just like everyone else and subsequently losing 30% similar to the rest of the field.

b) 0% invested in stocks while everyone else is 100% invested in stocks and consequently missing a 30% upside move.

If a) occurs, then your fund (comprised primarily of your client's money) loses money--at least on paper. But everyone else is in a similar boat. Your performance is in line with the field. If your clients are angry, where else can they go? All funds are down.

If b) occurs, then your fund hasn't lost a dime. On a relative basis, however, you are lagging the field. You have not made money for your clients like other managers have. Angry clients now see alternatives to you. They start pulling funds and placing them elsewhere. Pretty soon, you're out of a job.

The career risk associated with b) makes this a far scarier scenario for most financial professionals. As noted here, even when there are investment strategies that have been tested to outperform over time by staying on the sidelines during big moves (both up and down), money managers shy away from them because they fear missing some of the upside.

It is this fear of missing that ultimately leads to dominant strategies that bring catastrophic losses to most fund managers.