How FOMO investing could mean you make financial mistakes
Posted onDoes FOMO – the fear of missing out – affect your investment decisions? It can lead to you making investment decisions that aren’t right for you and potentially mean you take more risk than is appropriate.
At times, it can seem like everyone is investing in a particular company or sector. Perhaps you’ve seen a company feature on the news after share prices have skyrocketed. Or you’ve heard friends and family talking about how everyone is investing in a certain industry with the expectation that prices will rise quickly. If you’re not following these trends, it can seem like you’ll miss out on significant returns.
FOMO isn’t a new phenomenon, but it’s become easier than ever to share information. From social media posts to the investment segments of media, you can get an insight into how others are investing and it can shape how you view your own investments. It’s also easier than ever to act on these impulses. In the past, FOMO may have made you tempted to invest but it’s not something you could do straight away, providing you with some time to think. Now, you can transfer your money and invest in a matter of minutes.
If you’ve ever made an investment decision after hearing about a trend, FOMO could have influenced you.
Why does it happen?
No one wants to be the investor that missed out on an incredible opportunity. How would you feel if colleagues invested in a start-up that delivered huge returns within a year, but you hadn’t followed the crowd? You’d no doubt be frustrated. Thinking about “what if” scenarios like this can encourage you to invest in companies that you may have otherwise avoided.
While investments decisions should be logical and based on fact, your emotions and experiences do have an impact. It means that financial bias can influence how you invest and feel about opportunities. In the case of FOMO, the “bandwagon effect” can have an impact.
We’ve all heard the phrase “jumping on the bandwagon” meaning that someone is supporting a cause only because it’s popular to do so. In investment terms, the meaning is similar – that investment decisions are made simply because others are doing the same. If you’ve invested based on “hot tips” or suggestions that stocks will soar alone, you may have experienced the bandwagon effect.
Following a trend can provide reassurance that you’re making the “right” decision. It’s a bias that can also lead to you deciding to sell an investment because others believe the value of these stocks will fall. FOMO can mean you make investment mistakes because the decisions are driven by worries, not by what is right for you.
How to avoid investing FOMO
1. Remember why you’re investing
You should invest with a goal in mind and tailor your portfolio to reflect this. Remember, your reason for investing may be very different from that of friends or people speaking in the media. What is right for one investor may not be right for you. Keeping your goal in mind can help you focus on why you’re making certain investment decisions.
2. Try to screen out the day-to-day noise
Often, investment trends are short-lived. While a company may be “hot” now, will it still be in a year? For the majority of investors, decisions should be made with a long-term outlook. Jumping from trend to trend can mean you’re exposed to more risk and that you miss out on long-term growth. While it can be difficult to do, try to screen out the day-to-day market news and instead focus on the bigger picture.
3. Keep investment risk in mind
Usually, investments with the potential to deliver high returns are also high risk. Don’t just focus on the potential gains but the risk that you could lose your money; would you still want to invest in a start-up that everyone is talking about if there’s a high level of risk? Always consider the risk of the investments you make. Overlooking risk could mean some of your investments don’t align with your risk profile and wider investment portfolio.
4. Be patient
Finally, investing isn’t a way to get rich quick. While stories of investors seeing their net worth soar may feature in the media, they are few and far between in real life. For most, investing is a marathon, not a sprint. Be patient with your investments and focus on your long-term goal.
It can be difficult to remove financial bias from the investment process. However, working with a financial planner means you have another view on your investments, helping you to highlight where FOMO may be driving your decisions. Working with us can help you build a balanced portfolio that reflects your circumstances. Please get in touch with us to discuss your investment portfolio.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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