Although you wouldn't think so, fear of Missing Out (FOMO) holds a special place in the world of
investing. In this context, FOMO can be defined as the anxiety that arises given there is a belief that others are part of a fruitful opportunity one is not part of and is now considered a psychological driver as millennials look to take part in investing in hopes for greater future financial security. In an age where social media and instantaneous communication are now a given factor, the effect of FOMO has statistically impacted not just certain individual decisions, but also broader market movements.
FOMO now has a cycle associated with it. First, it starts with an urge to invest in a stock or sector that is trending in the market and moving upwards rapidly, often under the guidance of guaranteed profits. Investors fear missing out on profits their peers are seemingly capitalising on. This
emotional response can therefore be considered to eradicate all rational thinking and research to spark an impulse purchase. Many examples jump to mind, but one that stands out is the cryptocurrency boom of the early 10s, leading to viral stories of overnight millionaires across major news channels. Next however comes the point of downturn, where many FOMO investors often invest at the peak given the publicity behind it, which leads to their stock in the next few days taking a dip. This causes FOMO investors to fear the continuous losses about their purchase and sell their stock before giving it the proper time to mature and evaluate the changing markets. The cycle then repeats across many different stock purchases throughout their lifetime.
This is a role of cognitive biases in play, such as herd behaviour and recency biases, that cause
investors to behave like this. However, it's not all bad. FOMO investors often drive greater market
liquidity and innovation. Furthermore, the increased participation from retail investors leads to new
opportunities for wealth creation as well as brings even more attention to emerging industries, that
often need the support of marketing to grow and come into trend. The downsides on the other hand
are significant, FOMO-investing strategies are often unsustainable and almost always lead to a loss in capital.
A disciplined approach to investing is a simple way to avoid the pitfalls of FOMO. Education is
important. Understanding technical analysis can help investors make informed decisions. Simple
strategies such as diversified investing ensure that one's portfolio is not exposed to a single trend.
Understanding your own goals with investing and committing yourself to a long-term strategy before
starting may also help. These are all likely to prevent you from swaying according to the voice of the market. Overall, as long as investors can recognize the influence of FOMO on their decisions within the stock market, investors can hopefully navigate the complexities of the stock market with greater confidence.
References:
Idris, H. (2024). The Effects of FOMO on Investment Behavior in the Stock Market. Golden Ratio of Data in Summary, [online] 4(2), pp.879–887. doi:https://doi.org/10.52970/grdis.v4i2.757.
Investor.gov. (2022). Say ‘NO GO to FOMO’ | Investor.gov. [online] Available at:
https://www.investor.gov/additional-resources/spotlight/directors-take/say-no-go-fomo.
Malakar, M.K. (2023). Psychology of investing: What is FOMO and how to deal with it? [online]
mint. Available at:
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