Fear of missing out, commonly known as FOMO, is a slang term commonly used to describe the emotion or distress a person feels when they miss out on an experience that someone else may be experiencing. This emotion tends to arise especially when the thing they missed is perceived to be a fun or memorable activity. In the realm of investing, emotions often play a key role in decision making, and FOMO is one of the most powerful forces financial advisors often observe in their clients. When FOMO is combined with market hype, it can have a significant impact on fixed income investors. FOMO can affect even the most conservative investors, leading them to make decisions that go against their normal risk tolerance or be tempted into the wrong investments, which can be costly.
You may be wondering how FOMO affects retail investors, and here are some examples of people who may be reacting to or acting on FOMO.
1. Follow trends or jump on them: With the explosion of digital media, influencers, or in this case “financial influencers,” are everywhere. Many are credible and knowledgeable, but investors should choose and analyze sources carefully. Although tempting, don’t make investment decisions based solely on their recommendations. Some influencers may not do enough research or reveal their true motivations for recommending certain investment products.
2. Peer pressure and family pressure are another factor that may affect investors’ sentiments on whether to participate in a product offering.
Keep in mind that the investment goals and plans of family and friends may not align with yours. Their propensity for risk and the amount of capital they have available to invest may not align with yours either. “What’s good for the little goose isn’t necessarily good for the buck.” The desire to jump on the bandwagon with friends can result in investors getting into positions at an inopportune time, which leads to the third way that FOMO affects us.
3. Market Timing Gamble: FOMO can tempt bond investors to engage in market timing, trying to buy and sell securities based on short-term market trends. This behavior can also be at odds with a long-term, stable income focus. Buying high and selling low can negatively impact portfolio performance. Market fluctuations are inevitable, and investors who try to time the market can miss out on real opportunities. For example, with stocks, we have seen popular stocks skyrocket in price. If you buy when prices are at their highest, relying solely on hype, you risk incurring large losses when prices fall. When it comes to stocks, past performance is not necessarily indicative of future performance or prices. It is best to choose stocks that are consistent with your portfolio and have proven fundamentals.
Constantly comparing or worrying about your portfolio with others can lead to impulsive decisions and sleepless nights. FOMO investing can be very costly and lead to lower long-term returns. To counter this emotion, investors need to follow a disciplined investment strategy. Staying disciplined, informed and focused on long-term goals can help investors weather the challenges FOMO poses and build a resilient portfolio. Consult a qualified professional to help you avoid FOMO and plan proactively for your financial future.
Christine Rankin is Vice President of Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and products denominated in U.S. dollars and other foreign currencies to corporations, individuals and institutions. Visit our website at www.sterling.com.jm.
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