FOMO is a Very Costly Emotion

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Every day we’re bombarded with reports of what’s hot and what’s not – fueling a Fear-Of-Missing-Out (FOMO). Fear of missing out is a phenomenon that affects many aspects of our daily lives, and it’s far more prevalent than you might think.

In fact, FOMO was added to the Oxford English Online Dictionary in 2013, along with such other contemporary expressions as selfie and twerk. The emergence of social media has only compounded the FOMO effect.

The anxiety that we feel when we believe something better is happening elsewhere is ubiquitous, and investors are especially susceptible to its influence. Why? Because who doesn’t want to make money fast? In fact, Wall Street has embraced our susceptibility to this weakness and created an investment fund with FOMO in its name.

Unfortunately, FOMO and your investments are a combustible combination, similar to mixing bleach and ammonia together, a very deadly recipe. And something to avoid at all cost.

At some point, you’ll likely hear your neighbor, your friend, your friends friend, your co-worker, or somebody who made a lot of money quickly. If you are like most people, you’ll likely want to follow whatever they did. Why? Because your investments aren’t achieving the same results. Almost by definition, a well-built “all-weather” portfolio will never achieve stellar results over the very short-term; however, the superpower of this type of investing is in the strategy’s ability to do extraordinarily well over time, just ask Warren Buffett, Peter Lynch, or Sir John Templeton.

There’s a huge temptation to change course and invest in the latest hot streak. Fueling this urge is what’s called recency bias, a well-known cognitive bias that says: what’s happened most recently is more readily available in the mind and therefore the recent past = the future.

But changing your investment strategy to take advantage of a run that has already taken place isn’t a sound investing strategy, it’s FOMO and recency bias working against you. You can think of this way: Many times, this strategy would have you selling assets that may be undervalued, in order to buy expensive assets that have already gone up. This is buying high and selling low, which is the exact opposite of what you want to do, which is buy low and sell high.

Don’t be Fooled by FOMO

History is littered with examples of hot trends that reversed.

• In the late 1990s, some investors wanted to abandon their well-designed portfolios and buy the booming internet stocks. Then in March 2000 cracks began to form, and the technology market collapsed over the course of the next 2 ½ years, losing 78% of its value. It took a full 15 years for the technology sector to get back to where it was. Do you remember Pets.com, eToys, or Webvan? These were just three of the many companies that were going to change the world, what they changed was how quickly investors lost 100% of their money.
  
• In the mid-2000s, it seemed everyone wanted to borrow money to buy investment properties or flip real estate. I think we all remember how that ended, and how long it took to recover.
• Then, a few years after that investors were worried about a double-dip recession and wondered if they should load up on gold. Gold then proceeded to lose over 45% of its value and took almost 10 years to recover.  
• Most recently its cryptocurrency. If history is any guide…

 
In each case, FOMO caused investors to be more afraid of missing out than what the potential loses could be. In hindsight, for those people who changed their long-term investment strategy it was a serious and costly error.

When everyone from those in the media to your own acquaintances tells you to place heavy bets on one or more “hot” stock or sector that has recently done well, be wary. Be very wary.

How does a wise investor avoid falling prey to FOMO?

Remember the simple adage: “If it sounds too good to be true, then it probably is.”
 
-Paul R. Rossi, CFA