Investing: 4 tips for dealing with the dangers of FOMO

Karl 21st Feb 2024 No Comments

Reading Time: 5 minutes

Fear of missing out, otherwise known as ‘FOMO’, refers to the concept of worrying about missing out on exciting events that other people are experiencing.

When it comes to investing, FOMO can be dangerous because it’s a state of mind that can lead to investors taking on more risk than they are comfortable with.

In this article we’re going to explore FOMO further, including the psychology behind it, as well as the reasons why FOMO can be tricky to overcome. Click on a link to head straight to a specific section, or scroll down for all of the details…

The psychology behind FOMO
Why FOMO is dangerous when investing
Managing FOMO: 4 tips for investors

The psychology behind FOMO

‘Fear of Missing Out (FOMO) is a powerful psychological phenomenon that stems from our desire for social connection and belonging. In other words, it refers to the anxiety associated with missing out on rewarding experiences or social events that others are enjoying.

In today’s hyperconnected world, fueled by social media, FOMO has undoubtedly become more widespread. Scroll down your social media feed for example. It’s likely you’ll come across a barrage of posts highlighting the interesting lives of others: pictures of cocktails by the beach, extensive social gatherings, or extravagant holidays, we’ve all seen them!

When you view these types of images, you may be inclined to think that your life isn’t half as interesting. To put it another way, such posts can understandably encourage you to compare the lives of others with your own.

Perhaps you should be taking more holidays? Maybe your friendship circle isn’t big enough?

This is a classic example of FOMO.

The psychology behind FOMO is deeply rooted in evolutionary and social factors. Throughout human history, being part of a social group was essential for our survival, and exclusion could lead to vulnerability and isolation. While we no longer live amongst lions in the wilderness, FOMO has evolved in the digital age, where the constant stream of information about others’ activities intensifies our fear of being left behind socially or professionally.

Why FOMO is dangerous when investing

FOMO can have various negative consequences, including increased stress, anxiety, and impaired decision-making. This is why FOMO can push individuals to participate in activities or events solely to avoid missing out rather than pursuing their genuine interests.

FOMO can be particularly dangerous when it comes to investing. For example, say you come across a hot meme stock, or new investing product that everyone is taking about on social media. You may go on to discover that some people have multiplied their initial investment by tens, if not thousands!

In such a scenario, it’s easy to see how some investors may be tempted to give into the hype in order to avoid missing out on future gains – especially if many are giving the impression that a particular asset is just at the start of a colossal bull run…

While the desire to participate in lucrative opportunities is natural, succumbing to FOMO when investing can lead to irrational decision-making and a heightened risk of big losses.

Emotional investing

Here’s at Money Magpie, we’ve written before about the perils of letting your emotions drive your investing decisions, and FOMO is often a big reason why so many investors leave their common sense at the door when chasing the latest investment craze.

In other words, FOMO can lead to investors shunning fundamental analysis, risk assessment, and a well-thought-out investment strategy in favour of going ‘all-in’ to make a quick buck. This can increase the risk of investors buying assets at inflated prices which often ends in tears.

Who can forget the dotcom bubble in the 1990s? During this period a number of investors believed that Stock X would ‘go to the moon’ right before the bubble burst! In the end, the market capitalisation of dotcom stocks during this period fell $5 trillion from their peak. This was another classic example of FOMO at work.

Of course, everyone loves the thought of easy money. However, all investors should appreciate that a slow and steady approach has consistency demonstrated to be the most successful investing strategy, especially when investing over a long period of time.

Lack of diversification

Besides increasing the risks of investing in an asset bubble, it should also be noted that FOMO can increase the likelihood of investors forgetting about the importance of diversification when putting together a portfolio.

In short, investors driven by the fear of missing out on the ‘next big thing’ may concentrate their funds in a specific sector or asset class, neglecting the importance of spreading risk. A portfolio with a lack of diversification can make it far more vulnerable to market fluctuations which increases the likelihood of substantial losses if a chosen asset experiences a painful downturn.

Managing FOMO: 4 tips for investors

Managing FOMO is absolutely crucial if you’re an investor looking to make sound and rational decisions. And let’s face it, if you’re investing with your own money, making smart decisions should be at the top of your priority list!

Here are 4 strategies to mitigate the impacts of FOMO:

1. Stick to your investing strategy

Having a well-thought-out investment plan that aligns with your financial goals, risk tolerance, and time horizon is crucial for all investors. That’s because having a clear strategy and focus can ultimately reduce the chances of you succumbing to impulsive actions driven by FOMO.

See how to set your investing strategy in 5 simple steps.

2. Set realistic expectations

Whatever asset you choose to invest in, it’s really important you keep your expectations in check. Remember, even the so-called investing experts get it wrong, and there’s no skirting around the fact that not every opportunity will be a perfect fit, and not every market movement requires a response from you.

Setting realistic expectations and appreciating the fact that you won’t get rich overnight can go a long way in helping to mitigate any anxiety associated with FOMO.

3. Learn to be patient

Making investment decisions solely based on short-term market fluctuations or the latest trends can easily lead to big losses. Instead, understanding your personal time horizon, and being at ease with the fact that the stock market will almost certainly rise and fall over time gives you the best chance of putting yourself on the path of successful investing.

4. Diversify your portfolio

Diversification is a very important risk management strategy, if not the most important.

To get straight to the point, all investors should explore spreading their investments across different asset classes, industries, and geographic regions in order to reduce the impact of a single investment’s poor performance having a massive impact on the value of their wider portfolio.

In other words, investors should consider diversification as a way of giving a cushion against any sharp dips in a single asset or two.

Are you investing for the first time? Take a look at our article that explains how to start investing in stocks. And on that note… you may also wish to sign up for our fortnightly MoneyMagpie Investing Newsletter. It’s free and you can unsubscribe at any time.

Disclaimer

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.