FOMO Investing

By Srikruth Reddy 

“Is everyone making money but you?”

It’s a tranquil Saturday afternoon; you thanked your professor and closed the MS Teams application, concluding your online classes for the day. You reach for your phone, and involuntarily, your fingers slide to Instagram to look at your scantily familiar online commune. You see a multicoloured ring around your classmate's profile picture and click on it to see what he is up to today. The story appears to have a screenshot of his investment portfolio’s rallying trendline.

He captions it, “650% return!! Onwards and upwards!!!!!”.

 Good for him, you think and slip to the Insta reels section.

 Uninterested by a few daft dances, you keep scrolling, only to find a finance guru to lock your interest. He attempts to provoke your interest in a specific cryptocurrency by showing off his $2 million portfolio. He remarks how people who aren't investing in crypto are choosing to stay poor.

 The next day at your family rendezvous, you meet your humdrum cousin in his room. You find him gawking at three computer screens and analyzing a complex set of graphs and charts you’d typically find on CNBC. He mentions his triple-digit returns and how he quit his engineering degree to pursue trading financial instruments. A sense of missing out fills in. Waiting no further, you put your money into the cryptocurrency from which everyone seems to be earning tons of money without any research.

 

This precise phenomenon is termed FOMO (Fear of Missing Out) investing. You feel everyone is making money but you.

It’s inherent for humans to want a part of what all their peers seem to be doing. It's why we buy unnecessary yet trendy things, even if we aren’t necessarily interested in them.

 

FOMO investing has risen off late, particularly in 2020. With time aplenty, many had the chance to get into the stock market and cryptocurrencies. 2020 has seen Demat accounts rise to an all-time high, with over 10.7 million accounts created between April 2020 and January 2021. That’s an increase of over 200%, compared to the previous year. More people investing in stocks is undoubtedly joyous to the economy and themselves if done with vigilance.

 

The past year has seen meme stocks like AMC and GameStop rally to lofty heights, which caused quite the hysteria among many novice investors. Meme cryptocurrency, Dogecoin, which began as a joke, has climbed 12000% in May. A lot of this frenzy caused can be attributed to Tesla CEO Elon Musk's tweets. Today Dogecoin is worth less than a third of its all-time high in May.

                                 Credit: Google

The fear of missing out coupled with the prospect of making a quick buck can be powerful.

The desire to outdo our peers is quite primal.  This instinct, paired with looking at new highs in investments of others, can lead to poor financial decisions and be detrimental to one’s finances.

 

Investing behaviour triggered by FOMO can lead to economic bubbles. They occur when the prices of a commodity rise far above its actual value. Eventually, they burst when prices become unsustainable and fall dramatically until the entity gets valued at or below its true value.

 An example of this phenomenon was the dot com bubble of the late 1990s. Investors pumped money into Internet companies hoping to turn a profit, but the bubble burst, causing trillions of dollars in lost market value.

 

In 1999, billionaire investor Stanley Druckenmiller invested up to $6 billion in tech stocks, only to lose over $3 billion in 6 weeks.

 

Jumping onto the bandwagon can make us delusional; it instils an unfounded sense of confidence to put our money on financial instruments just because our friends did. Meme stocks and cryptocurrencies are highly volatile, and prices can change dramatically in hours. One day off the grid, and you could potentially lose all your money. Therefore, one must invest with great caution and proper research.

 

In an attempt to keep up, amateur investors often buy at or near resistance levels after a stock price has increased dramatically. As the stock falls, these investors recollect the gains it previously experienced. So, they hold on to those shares, hoping for a swift recovery. When the stock price goes down, fear starts to set in, inducing many investors to sell their holdings for significant losses.

Therefore, it is safe to say that ‘FOMO investing’ is quite a risky proposition.

So the question arises, how do you avoid getting swept away by the intense desire to FOMO invest?

According to evolutionary psychologists, getting over your primal instinct and eluding the FOMO requires miraculous strength since these impulses are intrinsically present in our behaviour. This modern emotion is rooted in an ancient survival instinct and one of the brain's most fundamental segments.

But here are a few ‘ hot tips ’ for you to not take ill-considered financial decisions: 

Credits: Google

1) Don’t jump onto anything after your friend tells you that a stock/cryptocurrency is the next big thing. Take your time and do your research to see if that investment will meet your financial goals.

2) Find a specific investment strategy or a combination of them tailored to your risk tolerance and time horizon. Doing this will ensure that you implement the plan to help you achieve your goals and not pick stocks haphazardly.

3)    Getting rid of behavioural biases and being objective is pivotal to get over that FOMO. Always remember to check out the information that may suggest against investing in your chosen stock. Give yourself a reality check, contemplate if you will beat the market or is it just overconfidence.

4)    Understand that ‘Rome wasn’t built in a day ’. Similarly, remember that you cannot accumulate lasting wealth overnight. Therefore, resist temptations, wait patiently and implement your strategy to achieve what you want fiscally.

 

Ergo, always do your research before deciding where to put your money, rather than entrusting the commotion and hype created by various stakeholders.

Credits: Google

 Invest with discretion; there are no two ways about it.

Graphics: Saketh