Five Ways FOMO Gets You Into Investing Trouble

FOMO – Fear of Missing Out – and Investing

Investing is about analyzing numbers and managing emotions.  The ups and downs of the financial markets can wreak havoc on our psyche.  This emotional turmoil and irrational decision making is so well documented that there is an entire field of research devoted to it called Behavioral Finance.

Do any of the scenarios below sound familiar?

We set an arbitrary price in our mind for stocks we own

• Maybe you have stock options through work or maybe you inherited stock.  Whatever the reason that you own an investment, you probably have an arbitrary price that you hope it will reach before selling it.  This is called anchoring.
• You own a stock, or a mutual fund, and the price is now below where you bought it. Maybe bad news came out about the company that caused the price decline, or the mutual fund has not been performing well and you are waiting until the price gets back to where you bought it before you sell it.  This is loss aversion.
• You own a stock that has risen a lot but you are afraid to sell it for fear that the stock keeps going up -- classic FOMO.  It is regret theory.
• You bought the stock of a company whose products you really like, or you think has a lot of potential, such as Nike or Uber, or maybe it’s the company that you work for. You think that the stock must go up because the product is so good.  This is a combination of Overconfidence combined with an Illusion of Control.

Professional Investors Are Not Immune

We all have experienced these scenarios.  It can lead to someone doing a lot of trading to try make up for a loss, real or imagined, or it can lead to someone not doing anything at all for fear of being wrong.  Either way, expensive mistakes are frequently made.

Professional investors are just as susceptible to these behaviors as non-professionals.  We have tools to try to take the emotion out of investing.  It may be a quantitative tool that triggers an automatic buy or sell order, or it may be fundamental analysis to create a price target.  The key is to have a system to override the emotion at the moment.

If you are aware of most common traps, then you can avoid the worst tendencies.

How to Conquer FOMO

Three things you can do:

• Learn how to calculate meaningful stock price targets so that you have a real number and not an arbitrary, wished-for number.
• Stop buying individual stocks unless you have a repeatable process for outperforming a basic index, like the S&P 500.
• If you own a stock through your employer, or if you have a very low cost basis stock and the tax hit would be big if you sold it, then have a plan to reduce your position over time based on your financial goals. Stick to the plan, regardless of price.  You don’t have to sell everything at once -- just take some gains to protect against a future downturn.

Focus on Your End Goal

Is the money for retirement or a legacy for your children and grandchildren?  Do you know how much you need to meet that goal and are you on track to reach it without a stock windfall?

If you are dependent upon a stock windfall to reach your financial goals, take a look at a few stocks that are down substantially from their high point and reassess if that is such a good plan:

Overstock.com (OSTK), Canopy Growth (WEED), Uber (UBER), General Electric (GE), Tesla (TSLA), Macy’s (M), Kraft Heinz (KHC).

I’m not predicting that these stocks will be up or down in the future, but I’m sure the employees holding stock in these companies today are disappointed.

Everyone likes to imagine quick and easy wealth -- buying a winning lottery ticket, successful gambling in Vegas, or hitting a stock homerun.  It happens sometimes and those stories become viral.  But history shows that the odds are against you.

At Archer Bay Capital, we help clients with their long term financial goals.  Contact us to share your FOMO story, or to schedule a consultation today.