FOMO, or Fear of Missing Out, is a term that first appeared in marketing literature in 2000. Today, studies estimate that around 70 percent of adults in developed countries experience the feeling that something’s happening and they’re not a part of it. This is just as true for investing as it is on social media. FOMO is real and can lead people to take investment risks that they otherwise might not. 

What Is FOMO in Investing?

In the simplest terms, investing FOMO is when somebody invests in a stock that has already seen stratospheric growth. These investors have missed the beginning of the stock’s rise and are taking the risk in investing, hoping that the asset’s growth will continue. Unfortunately, because these stocks’ value has already seen massive growth before FOMO investors buy in, investors typically lose money. 

Daniel Kahneman and Amos Tversky’s groundbreaking FOMO investing studies led to a model that helps us understand why people are willing to take these unprecedented risks. They suggest that people are affected by the pain of the perception of losing twice as intensely as they are affected by the pleasure of gaining. In other words, when we think we’re losing compared to what we see around us, we’re strongly affected and feel like we’re missing out, which leads to poor money management decisions. 

This is especially relevant to people with an investor mentality. Theoretical studies from Stanford and Duke economists suggest that the fear of loss is a less powerful motivator than the fear of doing poorly relative to a peer group. There is an enormous social aspect to FOMO that can make investors blind to the risk of buying into trendy assets whose value has already risen.

What Causes FOMO in the Market? 

There are several reasons that FOMO may arise that play into each other to make the feeling of FOMO and the risk-blindness that accompanies it more severe. It’s vital to remember that FOMO-based decisions aren’t actually grounded in the stock’s performance alone; rather, these decisions arise from feelings and social engineering.

Social Media and Forums

Trading communities arise wherever people can converse on the internet. Whether you’re participating in a dedicated forum or following other traders on Twitter, the conversation around stock buys and hot stock tips can encourage investment in a particular, popular trade. But just because a trade is popular doesn’t mean it’s right for your portfolio. It’s easy to fall into the trap of social pressure and buy into your FOMO impulses.

Public Attention

If a stock is performing well and is getting public attention, especially attention outside of specific financial circles, it can catch the attention of traders who want to hop on the train before it runs its course. But by the time a stock’s performance makes the main news cycle, it’s likely that its rally may have already finished. 

This is especially true of meme stocks, or stocks that everyone is buying as a joke. (Think of the Gamestop rally and crash in late 2021 and you’ll remember why meme stocks can be dangerous investments.) You might think you can pick up money in a meme stock, but these jokes are only funny for so long.

Market Volatility

Stocks are always rising and falling, and market volatility can be a great opportunity for investors. However, that doesn’t mean you should jump on every new stock opportunity. It’s often best to profit from market volatility through your existing portfolio rather than trying to predict an unstable future. Unless you fully understand why the market is fluctuating, you shouldn’t be furiously trading during a volatile market.

How FOMO Creates Stock Market Bubbles

Stock market bubbles are another major risk to your financial well-being that are provoked by FOMO investing. Bubbles always burst eventually, and they can cause a great deal of damage when they do. Investment crazes are ripe for FOMO, as investors see the potential for high returns and don’t necessarily acknowledge the risk of potentially losing their investment. 

This isn’t just a risk to individual investors — even huge firms and corporations like banks can throw their money at a bubble, sometimes to devastating effect. The subprime mortgage crisis and the collapse of the US housing market that started in 2007-2008 is a perfect example of the damage that stock market bubbles can do.

FOMO blinds us to the risks of investing in hot new stock, technology, or other assets. Stock market bubbles require two things: a lot of easy money and the belief that the bubble stock can only rise. It’s a narrative that’s ripe for FOMO investing, and the two feed into each other to create a perfect storm of bad investment decisions.

Why You Should Avoid “FOMO Investing” 

Even once you’re aware of the risks of FOMO, it can be hard to resist. The siren call of social pressure and the way our minds perceive risk and reward make it a real challenge to resist these risks. Awareness is a key tool when thinking about FOMO and how it can relate to your investment strategy.

Another element of FOMO to consider is your exit strategy for the stock or asset. When will you sell? Will you sell the whole stock quickly, or will you hold onto it and hope that it rises again? Neither is a particularly good option because FOMO isn’t a strategy. It’s a reaction, and reactionary investment isn’t the way to build financial stability. You want to get ahead of the curve, not behind it. In many cases, it’s best to avoid these bubbles entirely and instead keep your portfolio diverse and limit your exposure to any one sector.

Investing isn’t just about managing your money. It’s also about managing your emotions. At the end of the day, you can’t really predict the future, but you can come to rational decisions about what stocks are good for your portfolio and will ultimately grow your wealth. 

The Difference Between Fear and Opportunity 

But what if the stock you’re looking at really is the next big thing? While there are certainly arguments to be made for a conservative, steady stock portfolio, think about where we’d be if nobody invested in new technology or exciting new opportunities.

The challenge here is to figure out the difference between fear and opportunity and how to temper your emotions to make smart money moves. The first word in FOMO, after all, is “fear.” Being in a state of fear makes you erratic and reactionary, and it’s never a good place to make sound decisions. Before you buy into a stock, really think about why you’re going for it. Are you making a purchase based on fear or jealousy of your peers? Or does the asset actually tick your boxes for a safe investment, whatever that means to you or the brokerage you work with?

It can be hard to discern the difference between FOMO and a real opportunity, especially because FOMO is hard-wired into our emotional state. But there are ways to prevent yourself from investing based on FOMO alone.

Stick To A Strategy

A successful investor uses a strategy or mix of strategies to achieve success. There are dozens of strategies to choose from, and some of them are helpful in setting up resistance to FOMO. Letting the economy guide you with timed cyclical and non-cyclical investments, combining growth and dividends as your parameters for investing, or using the art of data analysis to find stocks at a discount are all solid strategies that leave little room for FOMO (or any emotion) in your investing choices. 

Do Your Research

Taking a fundamental approach to invest and using detailed research instead of technical cues to make your investment decisions is a strong antidote to FOMO. It requires you to pay close attention to the current and potential value of a company to develop a detailed understanding of the company or asset you’re considering before you make any decisions. This will better prepare you in the event of a stock run — you’ll have a better understanding of the intrinsic value of the asset and its potential performance down the line.

Sleep On It

An investment is a long-term bet that an asset is going to gain value. It’s improbable that a real opportunity will become a loss generator overnight. Give yourself time to do adequate research and consider the investment seriously. You don’t have to buy on the same day you find out about the stock.

Be Alert

When you’re working on your investment portfolio, it’s natural for FOMO to creep up and infiltrate your decision-making process. Make sure that you aren’t just paying attention to your portfolio but consistently monitor how well you’re sticking to your strategy. This makes it easier to notice when FOMO is affecting you. When that happens, it’s ok to stop for the day. Get away from the market and go do something else that allows the FOMO to wear off. 

Conclusion

If you’ve fallen prey to FOMO, don’t beat yourself up about it. You’re only human. What’s important for your portfolio and your wealth is to redevelop your sense of risk tolerance and be aware of what your emotions may drive you to do. 

If you’ve invested based on FOMO or have concerns about avoiding it and making smart investments in the future, you may benefit from the help of a financial planner, such as those at Alpha Wealth Funds. We’re here to help you make decisions about risk tolerance, investments, and anything else regarding growing your personal wealth. Reach out to us today to receive guidance as you continue your investment journey.

Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence

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Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.

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