The fear of missing out on a stock is all too real. FOMO, or “fear of missing out,” applies to the anxiety of potentially passing up a profitable investment, just as it applies to missing out on a great concert or a college reunion.
For investors who visualize a scenario where a stock rises sharply in value but goes unpurchased, the fear of missing out might keep them up all night.
Yet investors miss out on profit-making opportunities all the time. Consider, for example, an investor who makes a rational decision to buy into a conservative bond fund at the expense of a potential high-flying technology stock, under advice from an experienced financial planner.
Their money is parked safely in the fixed-income fund—but in the meantime, the high-flying stock rises from $20-per-share to $40-per-share. In this scenario, the fear of missing out on the stock market opportunity has been realized, thus giving the “FOMO” syndrome some real-world credence—at least in the short term.
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What Is FOMO Trading?
FOMO trading happens when investors let their fear of missing out drive their investing decisions—to the exclusion of other insights and instincts. This can trigger errors, creating problems in an otherwise well-managed investment portfolio.
For example, an impatient trader may rush to buy a hot stock even if it doesn’t fit into their portfolio strategy or if the stock risks could jeopardize its stability.
Yet buying any investment without proper research, risk assessment, or a planned exit strategy if the stock goes down is the opposite of effective stock market investing.
Understanding Behavioral Finance
Sociologists use the term “behavioral finance” to describe the need to abandon rational thought and follow a herd to mitigate any FOMO anxieties. With behavioral finance, emotional and sociological influences replace scrutiny and logical thinking, which can significantly alter investment outcomes.
The fact that so many stock market rumors are stoked on social media, and so many investors rely on social media for investment ideas, only adds more pressure to cave to stock FOMO and buy an untested stock.
Ways to Avoid FOMO Trading
How can an investor fight off FOMO tendencies and remain a stable and steadfast investor? Given the pressure to trade frequently, it’s not easy, but these tips can get you on the rational path to investment management.
Invest With a Plan in Mind
Investors who trade according to a well-thought-out plan or investing strategy—and not with a FOMO mindset—are likely to be more prepared for better investment outcomes. By researching, learning how to value a stock, and establishing your risk tolerance, you’ll be less likely to fall for the latest “word of mouth” stock and stop FOMO in its tracks.
Stay Calm in Highly Volatile Markets
Many impulse trades come at a time when markets move fast. When investing in a volatile market, it’s essential to trade with strategy in mind rather than feelings.
Be Sensible About Trading
A single stock market trade rarely makes or breaks an investment portfolio. If you hear about a can’t-miss stock and are anxious to pull the trigger and buy that stock, it can help keep it in perspective: there’s always another market opportunity down the road.
Avoid Investing Money You Can’t Afford to Lose
The adage “never play with money you can’t afford to lose” is very much in play with FOMO investing. It’s never wise to chase a stock with large amounts of money your portfolio can’t afford to be without. In nearly all cases, the risk may be too high and the impact too potentially severe.
Don’t Mistake Social Media for a Sound Investment Strategy
Undoubtedly, social media sites capture a great deal of attention from market investors. But these platforms may be loaded with touts, short-sellers, penny stock promoters, and other investment shills who have their best interest in mind—not yours. As a rule, social media touts always discuss their gains but rarely mention their losses. Remember that maxim when you’re under the temptation of a FOMO trade.
The Takeaway
FOMO trading is a behavioral finance type in which an investor lets emotions like the fear of missing out replace logical, strategic thinking. FOMO trading often happens on a whim without much thought, which can significantly impact investment outcomes.
