As a beginner investor, you’ve likely seen the term FOMO, whether in articles you’ve found during your research, on message boards you’ve visited to find opportunities, or in financial media when commentators talk about a big run in a stock’s value.
As you dive further into investing, you start to realize FOMO is involved in almost everything in the market. FOMO drives prices higher, it creates valuation bubbles, and it dictates what many investors do when they rearrange their portfolio.
But what exactly is FOMO? Why is it so common in discussions of the stock market? And why should you not act upon such an instinct that’s talked about so much?
What Is FOMO?
FOMO is an acronym for “fear of missing out.” It’s a primal emotion most people are intimately familiar with. FOMO isn’t just a stock market term — it applies to just about everything in life. For example:
- Career FOMO: You know a promotion is coming for someone, and you want to be the person chosen. The fear of missing out on the coming promotion might drive you to do and say things that may be out of the norm for you. Unfortunately, your boss may notice that you’re acting differently, calling into question your normal day-to-day activities.
- Shopping FOMO: You noticed a great deal on a brand new computer you’ve been thinking about buying when scrolling through Facebook. When you click the link, you see that there are only four left in stock. Even if you know that buying the computer now will put you in a bind for the week ahead, you might hurry up and buy it anyway before the seller runs out of stock. FOMO made the decision for you, as you were afraid you would miss out on the deal.
- Relationship FOMO: You’ve been in a relationship for a year or two. You’re thinking about proposing, but something’s holding you back. It’s likely the primal instinct, FOMO. Subconsciously, you may be holding back because you’re worried committing will cause you to miss out on the possibility of future relationships. However, waiting too long may cost you the great relationship that you already have.
No matter where you look in life, you find FOMO.
In the stock market, FOMO can be a dangerous thing. When a stock is climbing, you notice that the investors who own the stock are making a killing. Naturally, your thought is, “if they can do it, why can’t I?”
So, you jump in, ready to join the ride. Oftentimes that stock falls, though, leaving you to deal with the repercussions of buying a stock at highs.
Where Does FOMO Come From?
FOMO is an instinct that is wired into all human beings, and it’s never a good idea to allow your instincts to do your investing for you. Even cavemen had the pleasure of dealing with FOMO.
An article on IESE Business School’s website explained that the primal fear instinct was instrumental in the survival of our prehistoric ancestors. In fact, it was likely the fear of missing out on a long life or a good night’s sleep that drove early humans into caves in the first place.
So, the simple answer to where FOMO comes from is that it has been wired into you, but there’s a bit more to it.
The Primal Desire to Do Better Than Your Neighbor
You’ve heard the expression “keep up with the Joneses.” The premise is that human beings have a natural desire to do as well as or better than our neighbors.
For example, if your neighbor buys a new car, you may feel an urge to buy a new car — not because you need one, but because you want to keep up appearances or outdo your neighbor.
The same happens in the stock market. When a stock begins to see new highs, you know that your investing neighbor is doing better than you. The person who jumped on that opportunity before you knew it existed has made a ton of money. Following the herd, you decide to dive in as well.
FOMO has an effect on everyone — no matter how rich or successful you are, you’ve got proverbial neighbors with whom you may subconsciously compete. Even if you’ve already built yourself into a strong level of financial stability, it’s important to keep your FOMO in check to protect the wealth you’ve built.
The Fear of the 9-to-5 Trap
If you’re like the vast majority of Americans, you have a job that you go to at least five days every week. You may have vacation for a couple of weeks per year, but your day-to-day life follows a path that’s drawn for you on a schedule in the back office at your job.
The 9-to-5 trap is something everyone fears but few escape.
Many see the stock market as an opportunity to escape that hamster wheel. You often hear stories of the janitor or secretary that made smart moves in the market, helping them to amass a fortune and build a bridge to get them out of the 9-to-5 trap.
When you see a stock go on a tremendous run in value, it’s natural to want to get in on the gains — especially if you see the stock market as a way to escape having to work hard for every penny you earn.
The Desire to Give Your Children a Better Childhood Than You Had
No matter how good or bad you view your own childhood, you likely want to give your children better. This is yet another of those primal instincts that drive the everyday decisions you make.
It’s common for young parents to view the stock market as a way to give their children the college education, car, or down payment on a house their parents couldn’t afford to give them. You want your children to be able to tell their friends about fun vacations and amazing holiday seasons.
It’s also common for those young parents to see the stock market as an opportunity to achieve this goal.
This creates a fear of missing out on the opportunity to do better for your children, which could add to the emotion-driven decisions you make in the stock market, and the mistakes these decisions cause.
Why FOMO Is Dangerous
FOMO is an emotion that has the potential to drive your decision-making, serving up a devastating hit to your portfolio’s returns. Why is FOMO so dangerous?
There are two key technical indicators that every investor should pay attention to when making entrance and exit decisions in the stock market. Those indicators are known as:
- Support. Support is the point at which a falling stock is most likely to reverse and begin on a path toward recovery. For example, when a falling stock drops from $20 per share to $10 per share, then begins to move back up, $10 is the point of support. Therefore, if the stock starts to dive next time, you know that it’s most likely to reverse at or around $10 per share.
- Resistance. Resistance is the opposite of support, or the point at which a growing stock is most likely to reverse directions, starting to experience losses. For example, if a stock runs from $10 per share to $20 per share, then reverses direction and starts back downward, the $20 price is where the stock meets resistance.
When investing, it’s best to keep a close eye on the range between support and resistance because you should buy stocks near support and sell near resistance. Unfortunately, for many beginners and even some intermediate traders, FOMO leads investors to do the exact opposite.
In an effort to keep up with the Joneses, investors will often buy at or near resistance levels after a stock price has run upward. As the stock falls, they continue to remember the gains the stock recently experienced. So, the investors hold their shares, hoping for a quick recovery.
By the time the stock falls to support, fear starts to really set in, leading many investors to sell their positions at or near support levels for significant losses.
When this happens, FOMO not only leads investors to declines from making the mistake of buying at resistance, it hinders the investors’ opportunity to recover their losses when they sell at the bottom.
There’s no other way to say it: FOMO is dangerous.
How to Overcome FOMO
FOMO is a primal instinct. It’s ingrained in us from birth. If you find a way to completely overcome your most primal instincts, you’ll be a millionaire. Evolutionary psychologists have been trying to understand how our instincts are wired into us for decades.
Although you’re not going to be able to completely get rid of FOMO, there are ways to put it in check, making sure that it does not affect your investing decision-making.
If you want to be successful in the stock market, you’ll need to keep your FOMO under control. Here are a few tips to help you do just that.
1. Find & Stick to a Strategy
Any successful investor uses a strategy or mix of strategies to achieve that success. There are several strategies to choose from, each designed for a specific type of investor. Three great strategies to consider are:
- Timing Cyclical and Noncyclical Investments. Using the economy to guide your entrances into and exits out of cyclical and noncyclical investments is a great way to keep FOMO out of the investment decision-making process.
- Combining Growth and Dividends. Finding stocks with a history of compelling growth that pay strong dividends sets a distinct set of parameters to follow, once again kicking potential FOMO to the curb.
- Value Investing. Value investing is essentially the art of using fundamental financial data about companies to find stocks at a discount. This approach leaves little room for any emotions, including FOMO.
Regardless of whether you use one or more of these strategies or another mix of strategies in your investing efforts, sticking to your strategy will free you from FOMO-based investing decisions.
2. Take a Fundamental Approach to Investing
A fundamental approach to investing is the most research-intensive approach you can take, paying little attention to technical cues. Because a fundamental approach requires detailed research, FOMO is replaced with intellect.
When you take a fundamental approach to investing, you’ll pay close attention to the value of a company in terms of the potential of its current and future products, management team, current assets, debts, and other factors that will affect the financial stability and growth ability of the company represented by the investment.
This approach gives you a detailed understanding of the company or asset you’re considering investing in before you make your decision.
When you see a stock run, you’ll have an understanding of the intrinsic value of the underlying asset and be able to tell if the stock is overvalued, making it easier to walk away from loss-generating mishaps.
3. Avoid Making Decisions Before Sleeping on Them
A strong investment decision is one that’s driven by research and followed up with serious thought and consideration. If you came across a stock today, there’s no reason to buy today.
It’s true that time is money. But, when you make an investment, you’re making a long-term bet that the underlying asset you’re investing in is going to gain in value. It’s statistically improbable for a solid investment opportunity to become a loss-generating opportunity overnight.
While you shouldn’t wait months, or even weeks, to make investment decisions, it’s a good idea to give yourself time to do adequate research and give the investment serious consideration. A single day simply isn’t enough time to cover all of your bases without emotions kicking in and skewing your judgement.
Pro tip: Before you add any stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Trade Ideas can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.
4. Consider a Robo-Advisor or an ETF
With FOMO being hardwired into your genetic makeup, it can be hard for any human to put emotion to the side and focus on your portfolio. In fact, for some people, it may be nearly impossible.
If you’re one of those people, it’s OK. There are options out there that completely take the decision-making out of your hands while giving you exposure to the gains the market has to offer.
- Robo-Advisors. Robo-advisors like SoFi and Acorns take an algorithmic approach to investing. All you need to do is deposit funds and update your appetite for risk. From there, the robo-advisor does its job, investing for you and taking over all decision-making in the process.
- Unmanaged Funds. If you don’t want to trust your investing dollars to a computer, you can also invest in unmanaged ETFs, mutual funds, and index funds. These investments track a group of underlying assets, giving you vast exposure to a specific market index, industry, or a wide range of other categories. Such funds are known for providing strong diversification at low prices. Even Warren Buffett suggests that your money should be invested in low-cost index funds.
5. Know When to Walk Away
When deciding what your next investment might be or rebalancing your investing portfolio, you’ll have quite a few decisions to make. It’s natural for FOMO and other emotions to take over throughout the process.
As you make investment decisions, pay attention not only to your portfolio and your strategy, but also to how well you’re following your strategy. If FOMO starts to take hold and affect your investing decisions, and you’re paying attention to your strategy, you’ll notice.
At this point, it’s time to step away for the day.
Getting away from the market and focusing on other things will allow time for FOMO to wear off. From there, you’ll be able to start fresh tomorrow with bright eyes, a bushy tail, and a clear mind.
FOMO is a devastating emotion. That’s true in terms of investing as well as in life. It’s one of those emotions that can cause you to make all kinds of mistakes, whether in investing, your career, relationships, or budgeting.
The good news is you have the opportunity to address it if you know it exists.
Avoiding FOMO when investing by sticking to a fundamental strategy, taking adequate time to do your research, and knowing when to walk away has the potential to significantly increase your returns.
If you realize that setting your emotions aside is simply too difficult, don’t worry. Look to ETFs and robo-advisors to make your investment decisions for you, protecting you from FOMO and all other emotions that can devastate your portfolio’s returns.