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Investing and the fear of missing out

ICICIdirect 9 Mins 10 Jul 2023

Do you know what is the most essential ingredient to be a successful investor? Many things are on the list, but good investor behaviour is at the top. What does it mean? It means sticking to a long-term strategy and not getting caught in greed or fear. We have seen many investors making good investment decisions, but they lack discipline. Hence never make money in the market. An area where investors go wrong is investing out of FOMO - Fear of Missing Out. Today, we will learn about FOMO and why investors must not invest in FOMO.

What is FOMO?

FOMO is a psychological phenomenon that can impact investment decisions. It refers to the anxiety or concern investors experience when they perceive others making profitable investments and worry about missing out on potential gains.

To illustrate FOMO in investing, let's consider a hypothetical situation involving a technology company, XYZ Ltd. Assume that XYZ Ltd. is a well-established company performing exceptionally well in the stock market, consistently generating substantial returns for its investors.

Investor A, who is aware of XYZ Ltd's success, observes the company's stock price continuously rising over the last few months. The rise in stock price generates excitement and positive sentiment among other investors, as news and social media platforms highlight XYZ's growth and success. Investor A, driven by the fear of missing out on potential profits, feels compelled to invest in XYZ Ltd shares.

Meanwhile, Investor B is more cautious and takes a more analytical approach to investing. They carefully evaluate investment opportunities, including XYZ Ltd., by analysing financial reports, conducting fundamental analysis, and considering the overall market conditions. However, due to their more measured approach, Investor B may not feel the same sense of urgency or FOMO as Investor A, even if they acknowledge XYZ Ltd's success.

As a result of FOMO, Investor A may be more inclined to invest in XYZ Ltd. without conducting thorough research or considering potential risks. He believes that if others earn substantial profits, they should follow suit to avoid missing out on potential gains.

Associated risks with FOMO investing

Investing out of FOMO in equity markets can carry several risks, and investors can lose a large part of their capital. Some of the risks associated with making investment decisions based on FOMO are as below:

Overvaluation: FOMO-driven investments may cause certain stocks or sectors to become overvalued as investors rush to buy in without considering the fundamental value of the investment. Overvalued stocks are more susceptible to price corrections, which can result in significant losses when the market sentiment changes.

Herd Mentality: FOMO-driven investments often stem from a herd mentality, where investors follow the crowd without assessing the merits of the investment themselves. This herd behaviour can amplify market volatility and lead to exaggerated price movements, increasing the risk of significant losses.

Short-Term Thinking: FOMO-driven investors often focus on short-term gains and quick profits. It can prevent them from adopting a long-term investment strategy and considering the potential risks and uncertainties associated with the investment. Long-term investing is typically more stable and provides a better chance for sustainable returns.

Emotional Decision-Making: FOMO-driven investments are driven by emotions rather than rational analysis. Emotional decision-making can lead to impulsive actions, such as buying at market highs or selling at market lows. Emotion-driven trading can increase the risk of making poor investment choices and suffering unnecessary losses.

Market Volatility: FOMO-driven investments can contribute to increased market volatility. Sudden influxes of capital into specific stocks or sectors can lead to exaggerated price movements, making it difficult to predict market behaviour accurately. High volatility increases the risk of investment losses.

How to deal with FOMO while investing?

Investing out of FOMO is natural. For this reason, it is tougher to stay away from it. Sugar is not good, and even though, it makes you feel good, you always put a check on it. Similarly, you must learn to deal with FOMO. Here are a few things you can do:

Set clear investment goals: Define your investment goals and horizon with risk tolerance. Having a well-defined plan will help you stay focused on your own financial goals rather than getting swayed by others' actions.

Educate yourself: Learn about different investment options, understand the risks involved, and study the fundamentals of the assets you're interested in. The more knowledge you have related to investing, the better equipped you will be to make informed decisions.

Stick to your investment strategy: Develop a disciplined investment strategy that aligns with your goals. It could be long-term investing, value investing, or any other approach that suits your risk profile. Avoid making impulsive decisions based on short-term market movements or the fear of missing out on quick gains.

Focus on long-term trends: Instead of chasing short-term market fluctuations, concentrate on identifying long-term trends and investment opportunities. Understand the underlying factors that drive growth and evaluate investments based on their potential over time.

Perform thorough research: Before investing, conduct comprehensive research on the potential investment opportunities. Analyse financial statements, consider industry trends, evaluate competitive positioning, and assess the overall outlook. Rely on data and analysis rather than emotional impulses.

Stay disciplined and patient: Investing is a long-term endeavour. Stick to your investment plan, avoid impulsive actions, and be patient with the ups and downs of the market. Remember that FOMO-driven decisions often lead to suboptimal outcomes.

Before you go

Investors need to understand that FOMO-driven investment decisions can be risky. Stock prices can be volatile, and the perceived "hot" investments may not always sustain upward momentum. When the market sentiment changes, the stock price could decline, leading to potential losses for investors who succumbed to FOMO.

FOMO can be influenced by various factors, such as social media, news outlets, and peer pressure. While it's natural to be influenced by the successes of others, you must base your decisions on a thorough understanding of the investment, including its fundamentals, risks, and long-term prospects, rather than solely succumbing to FOMO.

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