FOMO in Investing
Fear Of Missing Out (FOMO) is an anxious feeling that others are having rewarding experiences that you’re not having. It is often triggered by social media showing exciting events, leading to a need to constantly check feeds, compare oneself to others, and feel left out. While FOMO is a common human experience, social media amplifies it. FOMO can cause stress, lower self-esteem, and disconnection. In investing, it can result in financial loss and related detrimental outcomes.
Investment decisions influenced by FOMO are often emotional, impulsive, and irrational instead of logical, and based on proper research and analysis. These decisions can lead to poor outcomes such as buying overvalued assets, panic selling during price correction, and neglecting long-term financial goals.
The GameStop Frenzy
During the GameStop saga in early 2021, the stock price surged dramatically, driven by enthusiastic discussions on online forums like Reddit’s r/WallStreetBets. This created intense FOMO as people saw others posting about massive, quick profits.
An individual investor, seeing the price skyrocket and fearing they would miss a “once-in-a-lifetime” opportunity, decided to invest their entire savings or even borrowed money (using margin) to buy shares near the peak price of around $120 per share.
The stock quickly collapsed, falling by over 90% within a few weeks. The investor who bought at the peak, acting on emotion rather than a sound, long-term strategy, experienced significant financial losses. This was the manifestation of the severe risk of making decisions based purely on the fear of missing out.
Effects of FOMO on Investors
Impulsive Decisions: FOMO triggers a sense of urgency, leading investors to rush into investment opportunities without conducting thorough research or understanding the underlying fundamentals.
Herd Mentality: Investors under the influence of FOMO tend to follow the crowd, or the “herd,” assuming that popular investments (like trending stocks or cryptocurrencies) must be correct because others appear to be making money.
Buying at Market Highs: By the time an asset’s price surge is widely known and creates FOMO, it is often already overvalued. Late entrants may face significant losses when the market inevitably corrects.
Increased Risk Exposure: FOMO can cause individuals to invest in riskier, speculative assets (such as fundamentally weak stocks or cryptocurrencies) that do not align with their personal risk tolerance or investment plan.
Short-Term Focus: It shifts an investor’s focus away from steady, long-term wealth creation strategies in favor of seeking quick profits.
Emotional Stress and Anxiety: Constantly worrying about missed opportunities and reacting to market noise can lead to heightened stress, anxiety, and an emotional rollercoaster that affects mental well-being.
Neglecting Personal Goals: Chasing popular trends can distract investors from their individual financial objectives, such as saving for retirement or a house, which are specific to their unique circumstances.
Strategies to Counter FOMO
Set Clear Goals: Define your personal financial objectives and risk tolerance to create a disciplined investment plan that helps you stay on track regardless of market hype.
Educate Yourself: Base your decisions on data and research, not noise or social media rumors. All assets follow Mean reversion. This theory explains that asset prices and returns tend to move back towards their historical average or mean over time. It means extreme price movements (too high or too low) are often temporary. Chasing these extreme scenarios is hard for even a full time seasoned investor.
Diversify Your Portfolio: Spread investments across different asset classes to manage risk, which helps cushion against market volatility and reduces the temptation to chase a single “hot” asset.
Limit Social Media Exposure: Reduce time spent in online forums or chat groups that promote “hot tips” or boast about large gains, as these can amplify the feeling of missing out. Always remember that almost everyone flaunts their profit making bets but very few share their loss making investments.
Take a Time-Out: When feeling the urge to make an impulsive decision, wait a day or two to gain clarity. In the long term, successful investing relies on discipline, a well-defined strategy, and a focus on personal financial goals. Therefore, the final decision to invest or not must align with your investing thesis and financial goals, and it should not just be an emotional reaction to market hype.
The Only Positive of FOMO
Acknowledging the influence of FOMO in an investing decision can provide valuable insights into an investor’s own behavioral biases and psychological triggers. This self-awareness, especially after a “bad” trade, can lead to more disciplined and informed future decisions.
FOMO forces an investor to confront their own psychological vulnerabilities and emotional triggers, which are critical components of successful long-term investing. A “bad” decision driven by emotion often provides a stark, memorable lesson that encourages the adoption of more disciplined, data-driven strategies in the future. By learning from a FOMO-induced mistake, an investor can develop the emotional discipline needed to stick to their investment plan even when faced with extreme market hype or volatility.
Learning from the moment of emotional irrationality is a lesson on behavioral finance that can strengthen an investor’s approach for the rest of their financial life.
