Many retail investors & traders in the UK are investing for the first time. Many also don’t fully understand how the market cycles work, or how to invest during inflationary periods.
As an investor, you must understand market trends, cycles and human psychology. There is always an urge to join others in investing in the latest trending investment.
In recent few years, cryptocurrencies and other digital assets like NFTs are the latest trend, but many don’t understand the risks they carry.
The urge to join others in investing in a product as its price surges upwards, creates what we call the fear of missing out (FOMO). FOMO is the fear of being left out while others cash-in on an opportunity especially one that has a lot of buzz around it.
What causes FOMO Investing?
There are many reasons why investors could be tempted to invest in something without fully understanding it, and the risks involved.
Many investors are propelled by greed which fuels FOMO investing. This greed leads them to investments they don’t fully understand.
Investors will always include risk management in their plans by using stop loss orders but rarely talk about how much profit is enough for them.
While the conventional wisdom is no asset continues rising forever, greed makes investors think they can make so much from a rising asset. The asset price finally crashes and the investors lose out.
Online chatter via social media
There is no doubt that social media influences a lot of investor decisions.
When the social media space is buzzing with news of a particular rising asset, many invest in it simply because it’s trending, and not because it’s rational and part of their investment plan.
Also, when an investment is endorsed by popular social media influencers, FOMO increases among investors.
When friends, colleagues, neighbours and family are all investing in an asset whose price is skyrocketing, you could be tempted to follow the herd.
A situation where almost everyone you know is investing in a company or a particular asset, could create a feeling of being an outcast which you may not want. Such scenarios can exert enormous pressure on you and can force you to invest out of the fear of missing out.
Celebrity endorsement and advertising
Celebrities could sometimes wield powerful influence in our lives, and the decisions we make.
When they promote some investment schemes on their social media handles, many are forced to believe them. This is even more effective when there is already a buzz around the asset being promoted.
Adverts can exploit your fear of missing out to sell you practically anything. They also make use of celebrity brand Ambassadors to add more glamour to the investment and turn fans to customers.
Their advertisement campaigns are also seen on social media where people spend most of their idle time. Social media platforms such as Instagram, Facebook, TikTok etc., have the most advertorial campaigns.
Lack of an investment plan
If you lack an investment plan, you are susceptible to investing out of FOMO. It serves as a guide to implementing your investment decisions.
It gives you a vision of what you want to achieve in the market, and directs where to invest in. The absence of an investment plan means you will be moved by emotions, and trending investments which fuels FOMO investing.
An impatient investor will always invest out of the fear of missing out. This is because impatient people do not stick to their investing plans. They’re always on the look for a quick way to make money, and investing requires patience. This can be dangerous as they most likely invest out of FOMO than out of reason.
The effects of FOMO
Buying of Meme stocks
A meme stock is one that is overpriced due to social media hype. The Fear of Missing Out makes many especially millennial investors, Gen Zs and novice investors, to invest in these meme stock with the hope of getting quick profit.
Stocks of AMC Entertainment and Game Stop Corp, witnessed a rise in price that was beyond their real market valuation, and this resulted in many young investors joining in, and be stuck in it at high price & losing millions because of FOMO among investors.
The people who hype meme stocks usually buy large volumes of the stock. When the price increases substantially, they dump the stock (sell their holding), and the share price falls immediately leaving innocent investors with losses.
Falling for Ponzi schemes
The prevalence of Ponzi schemes is where the FOMO patterns have been mostly seen. Many Ponzi schemes come in various forms, and promise quick and high returns to investors. The fear of missing out on such perceived windfall makes many to fall for these Ponzi schemes.
Ponzi schemes capitalise on an investor’s greed and impatience. Some Ponzi schemes will offer you a guaranteed return on investment of as high as 30% per month.
They will usually offer you a chance to benefit from an “investment” if you part with your funds. But you must not fall for such schemes.
Many investors don’t have the time to sit down and study the markets, but want to get in on the act when they learn about the markets going up. So, they choose to invest in schemes that invest for them. But many of these investors don’t do their due diligence on the firm they are dealing with.
“There are many forex scams that target UK based investors, many of which are promising unrealistic returns & are unlicensed. These are huge red flags.” said Karan Singh from Safe Forex Brokers UK, a comparison website for checking brokers.
“The most important check that investors must carry out if the firm is licensed by the FCA. And verify which products the firm is authorised to offer. By doing these simple checks, investors can protect against frauds.”
They will also ask you to recruit new members so as to get a commission from your downline.
They recycle payments received from new members to pay older members who then go to town with the news. When other investors hear of this “news”, FOMO investing kicks in, and the cycle continues till the Ponzi scheme crashes and the investors lose their money.
Getting into an Investment at the wrong time
Wrong timing could affect you when you invest out of the fear of missing out. Most times, when you make up your mind to invest in a fast-rising asset, it may already be approaching its ceiling and about to crash.
How to manage investing FOMO
Now that we have known the effects of FOMO, we will now look at how to manage FOMO in our investment.
Whenever you feel like urgently investing in a asset that is fast rising and becoming popular, take one or two days or even a week to observe and do your research on the company. A proper understanding of the background of that asset or investment, will help you manage FOMO better.
Learn to say no
To avoid FOMO investing, you must assert your willpower all the time when new investments are trending.
The Fear of Missing Out on the next big thing, has a huge influence on your investment decisions, and it is only by learning to say no, that you can avoid it.
Stick to your investment plans
As an investor you should have an investment plan. This investment plan should include your risk tolerance, diversification strategies, investment philosophy etc. It is not just about having a plan but sticking to it. Whenever you are getting distracted just remember your plan and work with it. If you must adjust your investment portfolio, take your time, and do your homework.
Check if the firm is licensed
Investors must verify if the broker you are dealing with is licensed by the FCA. Verify their license on the FCA Register to make sure that the broker/firm is licensed.
Don’t try to time the market
It is difficult to predict the movement of the market. This is because the market is volatile. It is for this reason you are advised not to time the market.
If you notice there is volatility in the market you can either do nothing, wait it out, or invest in safe asset classes. This is better than trying to predict a highly volatile market.
Learn about the investment
Whenever you are investing in something, so you should spend your time to learn about that investment. Learn about the risks involved, how much could you lose etc.
Do a proper due diligence of the investment.
Invest in ETFs so you can diversify and not feel left out
ETFs are a basket of securities and broad range of asset classes.
If you are a passive investor, then investing in ETFs for the long term can help you diversify your investment portfolio, provide tax efficiency and liquidity. ETFs can track a sector, index, or asset class.
If you invest in an ETF (like the iShares core FTSE100 UCITS ETF) that tracks the FTSE 100 index, it means that you automatically hold shares in all the 100 companies that make up the FTSE 100 index. By doing this you could be consoled that you are not missing out on any action.
Investment is a rational and logical activity. It takes time to process market information and come up with a strategy that works. Investing out of FOMO cannot guarantee you long-term returns.
You can also lose your investment in the process as you could invest where there is little or no intrinsic value in the asset. It can also lead you to getting swindled as there is no shortcut to success even in investing.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.