The Fear Of Missing Out – Many individual investors are plagued by the feeling of missing out on incredible opportunities in the stock market. But not just there. You can also see the same forces in cryptocurrencies, for example. But what is FOMO in stock investment? And what can you do to avoid it?
Your fear of missing out can be the reason your investment journey has not been as fruitful as you’d hoped it would be.
Controlling my mindset and resisting FOMO has been the best decision I’ve ever made in my investment journey.
The Psychology Of FOMO In Stock Investment
Stressing out about your money, worrying that you could lose your fortune. These are just some of the frequently encountered feelings of retail investors in financial markets.
What if the market drops 50% tomorrow? It has been going up for way too long! When does this end? I can’t stomach this; I will sell and save my gains!
What some investors experience is deeply rooted in a sense of insecurity. You just can’t imagine not selling your investments is a good choice. So, financial stress starts to build up until you finally take action. And when that happens, you immediately feel a sense of relief. You just saved yourself!
At least, you think you did. But was it really a good choice? Only time will tell.
This feeling of insecurity is also found on the other side. Imagine you buy a stock, and the next day, it loses 25%. Feels bad, right? One thing is certain: If you sell now out of panic, you will sit on a loss of 25%. Your thought process might say that you want to protect your money.
But what you should be doing is to step back and think: Was it bad timing, or is there more to the sudden drop? Did you miss something in your research? Or was this an event that was outside of the company’s control?
How Meme Stocks Have Taken Over The News
Remember the GameStop saga from 2021? Who could have predicted that a subreddit online community would create such momentum in the market to cause this massive short squeeze?
One thing is clear: There was a LOT of FOMO involved! Many people lost a lot of money because they jumped on the ship too late and missed the opportunity to sell before the downfall.
While it may sound appealing to some, buying into meme stocks with FOMO trades is a very risky endeavor. Their stock price movement becomes detached from the underlying fundamentals, causing it to be unpredictable.
I recommend staying away from meme stocks. There are so many other and better ways to generate wealth. All it takes is time.
How to Recognize FOMO in Yourself
Whenever something or someone uses a sense of urgency, it is likely a strategy to create FOMO. You can use this as a tool to spot it. I know it is easier said than done. Otherwise, I wouldn’t write this article in the first place. But there really isn’t much more to that.
In the world of responsible investing, time is always on your side. It usually does not matter if you invest today or tomorrow. You can always take time to think about your next investment. There really isn’t a need for any urgency at all.
Try to be more self-aware and recognize when you feel pressured to decide on your investments.
Strategies to Avoid FOMO in Stock Investment
When you invest in a more responsible way for the long term, the exact day you invest isn’t nearly as important as you think.
Time in the market is almost always better than trying to time the market.
You can use that to your advantage. The next time you plan to buy or sell company shares, just take a few days to think about your plan. Maybe your plan is motivated by FOMO. The extra time you allow yourself can make you realize that. This is the best way to detect FOMO-driven investment decisions in financial markets.
Your portfolio may be too concentrated if you constantly stress out about your investments. A high percentage of your portfolio in a single company can be a reason for that stress level. To limit this type of stress, you can diversify your portfolio.
There are multiple ways to do that:
Invest in 25+ company stocks
Put a portion of your portfolio into an ETF, or index fund
As an investor, you need to know your sleep number. This is the percentage of your portfolio a single company stock can have before you can’t sleep well anymore. Once a single stock exceeds that number, you can invest in your other positions or sell some of your shares to balance your portfolio.
Macroeconomic Events That Caused FOMO
If you want to know what future events will cause FOMO, you can take a look at the past. The last few decades provide a number of events to look at.
Tech Stock Mania (Dot-Com Bubble, 2000)
In the late 1990s, all companies had to have a compelling “Internet Strategy.” A company that merely mentioned the word internet was immediately a hot stock. Many investors flocked to these types of technology companies. It really didn’t matter if the company’s business model was good or not. FOMO in stock investment drove the prices up until the market peaked on March 10, 2000.
In 2001/02, after an exponential rise, the bear market hit. And with that, many companies went away or experienced a significant drop in value.
It would take the market 15 years to fully recover from that event. We didn’t lose the internet during that time. But we lost the companies that did not have a good internet strategy.
In some ways, this phenomenon is comparable to how companies use the word Artificial Intelligence right now. Sure, a lot of companies will make very good use of AI. But some of them will be left behind.
In 2020 and 2021, 480 and 1035 IPOs (Initial public offerings) entered the market. An IPO can be especially risky and a cause of FOMO in stock investment.
At the time of an IPO, you know the least about a company. Will this company be the next Amazon or not? It is a tough question for any company. But for a newly listed one, your odds are even worse.
Regardless of that fact, many people participate in IPOs in hopes of making a lot of money as quickly as possible. Seeing a surging stock price on the first trading day has something magical that you don’t want to miss out on, right?
Nevertheless, I very rarely invest in IPO stocks. If a company is good, I can also let it prove itself for a few quarters. And in doing so, my later investments will have a very good chance to grow with less risk attached.
COVID-19 Vaccine-Related Stocks (2020-2021)
When Pfizer and BioNTech came along with their vaccines, they offered a glimmer of hope so many of us have hoped for. At that time, there wasn’t much good news in the open.
In extreme events like these, it was easy to see that their stocks could only go up, right? Well, not so much, as it turns out.
Now, 3 years later, we have more data available. If you invested $1000 in Pfizer in March 2020 ($33), you now have ~$880 (1/4/2024 – $29). In between, the stock peaked at $53 in December 2021.
Your motivation to invest in Pfizer would have been completely based on short-term news. That is unless you thought their revenue increase due to the vaccine would have been permanent.
The Boring Alternative – Long-Term Investment
First of all, investing is not the same as trading. What I mean by investing is buying and holding good companies. Preferably, you do that for a long time because all good things take time.
Long-term investment is one of the most effective ways to build wealth. It does not need a complex trading plan or trading strategy. And it does not require a lot of your time either.
By investing your money continuously and taking advantage of the power of compounding, you can grow your wealth substantially over time. All you need to do is invest in broad index funds.
If you are an investor with a high risk tolerance, you can invest in individual companies. It will take more of your time to stay on top of your investments, but it offers the potential for outsized returns. I’ve written a detailed guide about my framework for evaluating a company. Using this framework, you will get to know much more about the company and see if it is worth your money.
Of course, you will inevitably have to endure downturns in the market. Those can feel bad at the time, and you might feel like you have to get out. But by following the tips from this post, you can get over market volatility. You can equip yourself with the tools to deal with these difficult market conditions.
Keep in mind that past performance is not a good indicator of any future returns. Investing in individual companies is much more risky. It is hard to find the next big thing in the stock market.
“Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.” ― Morgan Housel, The Psychology of Money
It’s Time In The Market, Not Timing The Market
Always trying to hit the perfect time to buy or sell your assets is a stressful game. And your odds of success aren’t very good.
Take this fictional story of Bob – The world’s worst market timer, as an example. He invested over a timeframe of 42 years, from 1970 to 2013. His investment timings were absolutely and horribly plagued by the worst timing ever – always before a huge stock market crash. Yet he still managed to become a millionaire.
I really like this story. It shows that even in the most extreme scenario, long-term investing has returned a good result. I’m pretty sure that your investments will not be plagued by the same fate.
Final Thoughts – What Is FOMO In Stock Investment And How To Avoid It
Investing your money is generally a very good thing to do. But with that, you should avoid hasty decisions to prevent significant losses.
FOMO, or the fear of missing out, is one of the biggest drivers of such losses. By trading on short-term news, you expose yourself to an unnecessarily high risk that can really hurt your bottom line.
Long-term investing offers a safer route and prevents impulsive decisions. It allows you to take your time in the market.
Disclaimer: The information in this blog post should not be considered investment advice or a replacement thereof. They are solely provided for informational purposes. Please consult with a financial advisor for any specific questions on your financial situation. Remember that past performance is not a good indicator for future returns. Also, none of the mentioned stocks are to be understood as recommendations. Don’t buy yourself something solely based on what you read here.