FOMO & Investing
Understanding FOMO: Investing’s Poison Pill
In the social media age, we’ve become increasingly connected to those around us. Because most people share only the positive details of their lives, it sometimes gives the appearance that everyone else is having fun or experiencing success while we’re at home, looking at our phones.
Because of this, the fear of missing out (FOMO) has become a common experience. The more common it becomes, the more it can find its way into other aspects of our lives. For investing, FOMO can have disastrous effects. The good news is, we can conquer FOMO and remain in control over our investment decisions.
But, in order to do that, we’ve got to understand what it is.
What is Investing FOMO?
FOMO is the anxiety that others might have rewarding experiences and you won’t. Because these experiences could happen anytime or anywhere, FOMO can often transform into the desire to stay connected to everything all the time. It sometimes manifests itself as a need to know everything that’s going on so you can always make the most rewarding decision.
So, it should come as no surprise that experiencing FOMO eventually found its way into the minds of investors. With so much at stake (life savings, future riches, infamy, etc.), it’s hard to watch others succeed while we struggle. They make it look easy, and we sometimes become jealous and resentful.
And once that happens, it can begin negatively affecting our investment decisions.
What are the effects of FOMO on investing?
FOMO is, primarily, an emotional response. Because of that, it can infect and seize control over our decision-making process. This can cause a string of negative effects on our investments, our personal finances, and our careers. Some of the most common effects FOMO has on investing include:
FOMO often interrupts our ability to think reasonably. When we see others make successful decisions, we can feel the need to copy them to find our own success. When that urge to buy strikes us, it can present itself as a decision that (a.) will only have positive results, and (b.) must be made immediately.
Our emotions can surge dramatically and make us feel like we don’t have time to think about our decisions; all we can see are the results we so strongly desire. We hear about a stock, bond, or real estate investment that could help us succeed, and we immediately want in. Rather than taking a moment to think about the consequences, we make what often turns out to be a rash decision.
Understanding how much risk you’re willing to take is one of our retirement mastery principles for a reason: understanding risk is important for successful investing.
The decisions we make when experiencing FOMO are naturally riskier than decisions we make while thinking clearly. Part of the reason risk increases in these moments is that they occur at the wrong time. In fact, FOMO can force us to work against our own instincts and break one of the first rules of investing: buy low, sell high. Buying low helps us reduce the risk of bigger losses.
But consider when we might feel like we’re “missing out” the most. Usually, it’s when others are already experiencing success. We could invest in the same stocks they have. But, by then, it’s likely too late. The stocks that have helped them succeed are already at a higher price. In order to find the same success as them, we would have had to buy when it was low.
FOMO can cloud our judgment. And the more we chase the success of others, the more likely we are to make increasingly risky or desperate decisions.
Increased market volatility
To the market, one person experiencing FOMO is a drop in the bucket. When it happens on a bigger scale, it can have a much bigger effect. If a large portion of investors chase the same stocks to find success, it can affect prices. This can lead to volatility as stocks without a proven track record get repeatedly bought and sold. Across the market, prices can quickly rise and fall, causing more uncertainty among investors—and potentially even more volatility.
Having confidence in our ability to make positive decisions is a key aspect to finding success when investing. But, with a lack of strategy and due diligence, FOMO decision-making can lead to a string of failed investments. The more this occurs, the more it can damage your confidence.
The less we trust ourselves, the less likely we are to make successful investment decisions. This can snowball into a cycle of bad decisions and failures difficult for us to come back from.
What causes FOMO?
The way we consume information is a primary cause of FOMO. Every time we watch videos online, check social media or check up on the news, we experience a barrage of constant updates about what’s going on in the world. This can be a positive thing. For instance, as big as the internet is, we can always find our niche to learn more about the things that matter to us.
But when we do that, we can also open ourselves up to FOMO. When we focus on the things we care about, we often find stories about other people’s successes in that area. Examples of streams of information that can produce investing FOMO include:
I look at a lot of financial and investment news. Every time I visit one of these sites, there are always plenty of stories to consume. Some stories have stock tips or advice on how I should invest in the future. Some are profiles of investors who’ve made a lot of money by making the right investment decisions. Often, I find stories about a stock that’s taken the world by surprise and skyrocketed seemingly out of nowhere. These sites make it easy to log on, read a few stories, and think, “That should’ve been me.”
Many sites dedicate themselves to bringing people together to discuss any topic that’s meaningful to them. When you log on to investment forums, you can find a lot of helpful information about strategy, skills, and market data analysis. You can also find lots of people sharing their success stories or putting down others who haven’t been successful. If there’s a lack of moderation, forums like this can become a toxic environment that feels more like people patting themselves on the back, rather than offering helpful advice.
All of this can serve to make us feel less certain about ourselves and can cause us to compare ourselves to others.
News travels fast. When looking at social media, it seems like we can experience world events in real-time. When there’s a hot new investing tip, it can spread like wildfire. Seemingly good and trustworthy tips get posted on social media all the time. It can often feel imperative that we act on these tips immediately if we hope to beat everyone else acting on the same information.
Social media is also littered with success stories going viral, making us question our own life satisfaction and lending credence to otherwise unhelpful advice.
The popularity of meme stocks continues to rise. The reason is simple: they can be fun to watch. They often start off as a joke (“What if we all bought this one cheap stock?”). As more people buy them, they can quickly appear to be successful. The problem with meme stocks is that it can be very difficult to understand which ones are actually successful and which are only successful because of a meme.
How can I conquer FOMO?
The thing about conquering FOMO is that you likely already have the tools to do so. And that’s great news, since conquering FOMO usually means fighting against your own emotional urges. It’s important to keep in mind that FOMO is something you experience yourself, and that means you get to decide how you choose to fight it. When you feel like you might be experiencing FOMO, consider these strategies:
Be honest with yourself
The first step in conquering FOMO is admitting that it’s taken hold. There’s no shame in feeling envious that others might have the success you want. In fact, this happens to pretty much all of us. Being truthful about how you feel can help you tackle the problem with a cool, reasonable head—which is something you’ll need to invest successfully.
One of the best ways of beating FOMO is, coincidentally, one of the best paths toward being a successful investor: research. By educating yourself on successful companies, what makes them successful, their plans for future projects, etc., you can make more informed investment decisions. If you only make investments after researching a company or its stock performance, you can help reduce the risk of FOMO investing.
Research can also help you understand the entire market more thoroughly. For example, if inflation data points to rising costs and the Federal Reserve announces an interest rate hike, you can adjust your investment strategy to reflect the coming changes. Is everyone else selling? Study how to invest during a bear market.
Remember: the decisions are always yours. The more knowledge you have going into them can help you make betters.
Keep to the plan
Do you have an investment strategy? Maybe you only plan to invest in certain types of companies or only make investments that help you reach long-term goals. Whatever your plan was when you began investing, stick to it. This can help you avoid looking for quick money or making rash decisions. Before making an investment, you can ask yourself, “Does this fit into my plan?” Be honest about your answer.
Avoid “sexy” investments
New, successful stocks will always have a strong allure. Part of the allure of sexy stocks is the possibility of making a lot of money very quickly. However, the risk is usually extraordinary and could cause big losses.
For long-term goals, it could be better to make low-risk investments that could pay off well over the next few years or decades. Consider investments such as index funds. Mutual funds and exchange-traded funds (ETFs) that track indexes such as the Dow Jones and the S&P 500 might grow slowly, but they do so consistently.
Part of the problem with FOMO is how often it convinces us to act on our impulses. However, impulsive investing isn’t usually a formula for success. Whenever you feel an impulse to buy a stock immediately (especially one you haven’t researched or have only learned about), try taking a day or two to make a purchase.
Overnight successes don’t happen often. When they do, they’re nearly impossible to predict. Because of this, you’re unlikely to miss out on a stock’s success by waiting a few days. You can use the extra time to research the stock and discover whether it’s an investment you’d actually like to make.
Accept that you might miss out
One positive way to deal with FOMO is to accept that there are opportunities you might miss. And that’s okay. There will always be more opportunities in the future for you to find success. No one can “win them all,” but you can still win.