Are you feeling it? It seems that everyone from grandmas to college kids are. They’re watching the news, reading friends’ social media posts, and hearing some fantastic stories about stratospheric investment gains. And it makes them feel like they’re missing out. Maybe you’re worried you’re missing out too.
The problem with this fear of missing out (or FOMO) is that acting on it can hurt you. Read on to learn why investing FOMO should raise a red flag and what you can do instead.
What Is Fear of Missing Out?
The markets and economy are ripe for FOMO. Real estate is at an all-time high. NFTs are hot. SPACs are soaring. Investors are buying big-time into ESG. And depending on the day you’re reading this, cryptocurrency may be breaking another record (or it might have lost 50% of its value, which it also seems to do regularly).
If you feel like you’re sitting on the sidelines while everyone’s in the midst of the action and getting rich off it, then you might feel the impulse to jump in yourself. The impulse can be unbearable.
Some like to call it greed; others, exuberance. But whatever you want to call it, FOMO is a real thing. It’s a drive to not be left behind. It’s a push to keep up with the pack so that you’re not eating crumbs while everyone else gets the pie.
Why Is FOMO So Bad?
FOMO affects us across all areas of our lives, but when it comes to investing, it can hurt our long-term financial success. It can lead to risky investments, which in this climate, is distressingly easy to achieve.
It seems that people are willing to invest in anything, from digital cats to Dogecoin, a cryptocurrency that began as a joke. There’s even an exchange-traded fund called FOMO that aims to invest in trends like SPACs and derivatives. Its filing with the Securities and Exchange Commission states that its tactical approach and frequent trading can result “in a high portfolio turnover rate.”
No kidding!
FOMO short-circuits our logic and spurs lousy investment decisions. “Rather than buy stocks when they offer the most attractive risk-to-return ratio, investors are driven to buy them to an even greater degree the less attractive they look technically,” says James DePorre in “Understanding the FOMO Phenomena.” “Our fear of missing out becomes greater the more the market continues to act in an irrational way,”
When many people jump on the FOMO bandwagon, prices climb, which heightens the fear of missing out. But the problem with emotionally driven decisions is that you can be left holding the bag when the same bandwagon panics and rushes to liquidate their holdings.
Are We in a Market Bubble?
When asset prices surge, the markets eventually reset. Many analysts say that we are in such a valuation bubble now and that investors should expect a drop.
We aren’t fortune tellers here at Northstar Financial Planners, so we can’t predict when a bubble will burst. But it’s important to look at the fundamentals, and the Forbes article “Investors, Don’t Succumb to the Fear of Missing Out” has a telling one:
“The impressive stock market returns over the past decade have partially reflected corporate earnings growth, but a good portion of the gains have been the result of stocks becoming more expensive. One of the key metrics of relative expensiveness is the Shiller Price-to-Earnings ratio (also known as the CAPE). It currently sits at an eye-popping 35.8 times earnings, 50% above its long-term average and second only to the peak it reached during the dot-com boom. The market is expensive.”
Many of today’s FOMO-driven investors are too young to remember the dot-com bubble of the late 1990s, but it also featured exuberant investors ignoring metrics like the P-E ratio. And when the market came crashing down, many dot-com companies went under, and many investors lost a lot of money.
What’s the Antidote to FOMO?
Since the fear of missing out can inspire irrational behavior, it’s important to deal with FOMO, especially when it comes to your money. Here are some of our investing FOMO tips:
Rather than try your hand at “get rich quick” strategies like stock picking, have a long-term investment strategy.
When markets go up, stick to the strategy.
When markets go down, stick to the strategy.
Own a diversified investment portfolio so that if a sector like tech stocks tanks, you help minimize the damage.
If you have trouble sticking to the strategy, consider:
A robo-advisor, which follows algorithms, not hype
A mutual fund or exchange-traded fund (ETF) that is well-diversified
A fiduciary financial advisor who can help you create a strategy and will be there to coach you through the inevitable market highs and lows
Learn about stock fundamentals, and use them rather than a friend’s stock tip to evaluate a potential investment.
Take a cooling-off period (e.g., 24 hours) before buying a “hot” investment.
If you want to buy into a trend, use extra cash rather than money you earmarked for savings or retirement, like your 401(k) or IRA contributions. Make sure you’re comfortable with the idea of volatility.
Turn off the news. You’ll feel a lot better.
These tips may lack the adrenaline thrill of “ buy, buy, buy,” but in the case of investing, boring is good. Boring helps you sleep better at night and helps build wealth over the long term.
Schedule a complimentary consultation with one of our fee-only financial planners to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.