What is FOMO in Stocks?
The Fear of Missing Out, or FOMO, is one of the most destructive impulses that an investor can experience. Investors experience FOMO when they feel the need to buy or sell a stock because it is popular or unpopular. A typical FOMO case is thinking you need to buy the latest hot stock because everybody else is buying it.
FOMO is destructive because it drives people to invest without thinking or conducting research. Avoiding FOMO is hard because basic human emotions and instincts drive it.
FOMO in Stocks Can Be Destructive
The emotions that drive FOMO are the fear of loss and the fear of not being part of the group. Fear of loss occurs when investors see other people making money.
Fear of not being part of the group happens when you think everybody knows something you do not. We make this fear worse with the suspicion that others are deceiving us or withholding information.
Fraudsters love FOMO because they can use it to peddle secret knowledge or methods. Con artists use FOMO to market “beat stock market methods” based on the “secret knowledge” they claim wealthy investors possess.
FOMO is a Marketing Tool
Fear of Missing Out is a universal emotion that affects everybody. ADWEEK estimates that 56% of Social Media Users and 69% of Millennials, people aged 25-40, admit to suffering from FOMO.
FOMO will strike all investors at some point. An investor who claims he or she is immune to FOMO is a liar.
Investors need to learn to control FOMO because it leads to reckless and irrational decision making. Brokers, fraudsters, and marketers understand the power of FOMO and use it to take investors’ money.
Brokers encourage FOMO because they make money when investors trade. Brokers do not care if the investor makes money because they collect fees whenever a person buys or sells a stock. The more stocks a person buys or sells, the more money the brokerage makes.
Digital technology makes the situation worse because engineers design investment apps, such as Robinhood and the Cash App, to encourage FOMO. Robinhood encourages reckless decision-making and mindless trading, critics such as Matt Taibbi allege.
How to Avoid FOMO in Investing
Investors need to understand FOMO because today’s marketplace thrives on FOMO. No investor is immune to FOMO, but you can become resistant to Fear of Missing Out. The best investors understand that FOMO is a constant threat everybody must manage every day.
The good news is that you can teach yourself how to manage FOMO. Many hacks can help you control FOMO and keep it out of your decision making.
6 Methods of Managing FOMO in Stocks
1. Create a Plan & Stick to It
By far, the best way to avoid FOMO in stocks is to create an investing strategy, turn it into a plan, and stick to the plan. The most successful investors, whether fund managers or individual investors, have a trading strategy.
There are many approaches to making money in the stock market, from Value Investing, Income Investing, or Growth Investing through to Trading; each strategy will require a different plan with different stock selection criteria.
Once you have a plan that you believe in, preferably one that is back-tested to stand the test of time, you can implement the plan and build out your stock portfolio. Once you do this you will have the peace of mind that reduces your fear of missing out.
2. Limit your News Consumption
The world’s most successful value investor, Warren Buffett, manages FOMO by ignoring the news. Buffett famously ignores financial news when he picks stocks.
“We watch the prices of things we do more than current events,” Buffett said of his Berkshire Hathaway (BERK.B) team in a 2019 CNBC interview. Buffett and his team base their decisions on financial reports and stock prices rather than news.
Buffett understands that “news” promotes FOMO by focusing on the most exciting aspects of investment. Journalists only report on stocks that experience big price changes, for instance.
This practice creates FOMO by manufacturing a sense of impending doom or sudden wealth. Investors who watch news channels see many stories about hot IPOs, sudden price increases, and other exciting events. Producers focus on those stories because they attract attention.
Buffett knows that news organizations are in the attention-getting business, not the fact-reporting business. Producers, editors, journalists, and media executives know that more attention attracts more subscribers and advertisers. News organizations make money by selling advertising and subscriptions.
Buffett understands the news because he was in the newspaper business for 45 years. Buffett owned newspapers because they made money from subscriptions and advertisements.
Buffett limits news consumption because he knows the news offers a shallow, simple, and inaccurate picture of events that encourages FOMO. You can avoid FOMO by limiting your news consumption.
Not watching news channels and ignoring financial news on social media are good ways to avoid FOMO. A constant financial news diet leads to FOMO because brokers know how to manipulate journalists to promote FOMO and increase stocks’ sales. Journalists go along because FOMO helps them attract attention and make more money.
3. Limit Your Social Media Use
Social media is one of the most powerful drivers of FOMO. ADWEEK estimates 69% of Millennials (age 24 to 40) fear missing out if they do not check social media.
Scientists have identified FOMO as a predictor of problematic social media use, an article in the International Journal of Environmental Research and Public Health claims. Social media causes FOMO because it demands constant attention and instant action.
A person who is constantly receiving messages promoting the latest hot stock cannot avoid FOMO. The best way to manage Social Media FOMO is to limit social media use.
You can avoid Social Media FOMO by only using social media to communicate with friends, families, and coworkers. One way to avoid FOMO is to ignore all messages from anybody you do not know. Another is never to read social media messages about stocks.
A final way to limit social media is only to check your social media messages once a day. Limiting social media use can help you control FOMO.
4. Wait to Make Investment Decisions
If you make investment decisions fast and without research, you will make terrible investments. FOMO causes such mistakes by demanding immediate action.
A good way to avoid poor decisions and discourage FOMO is to always wait a week or longer before making an investment decision. Waiting a week can ensure that you will be sure of your decisions.
Giving yourself a week will give you time to research the investment and think about it. Waiting can prevent FOMO because the anxiety FOMO causes will vanish.
Once the feelings settle down, you can think clearly, rationally, and strategically. You can examine all the aspects of the investment and make an informed decision. The longer you wait, the weaker the FOMO will become.
5. Automate Investing with Index Funds
The best way to keep emotions, such as FOMO, out of investing is to remove yourself from the stock-picking process. You can automate your investing and eliminate FOMO by investing in index funds or exchange-traded funds (ETFs).
An S&P 500 index fund owns stock in the 500 largest publicly-traded companies in America. Such an index fund eliminates FOMO because the only criteria its managers use for stock ownership is the company’s size.
If you cannot avoid FOMO, one of the best ways to ensure you have money in the future is to invest at least 25% of your funds in an S&P Index Fund. One person who believes in Index Funds is Warren Buffett. Buffett will instruct his estate to invest 90% of the money he set aside for his widow in S&P Index funds, CNBC reports.
6. Ignore the Market
Constantly watching the market will lead to FOMO because there will always be impressive or interesting stocks you do not own. No person, even Warren Buffett, can track every investment and spot every good stock.
“We’ll miss a lot in the future, we missed a lot in the past,” Buffett admitted at the 2019 Berkshire Hathaway Shareholders meeting.
Buffett admits he missed many money-making stocks, including Apple (AAPL), Amazon (AMZN), and Alphabet (GOOG) in the past. Yet Buffett has no regrets because he does not watch the market.
Buffett concentrates his attention on the individual stocks he is interested in and ignores everything else. By not watching the market, Buffett avoids FOMO because he does not see all the stocks he failed to buy.
Following Buffett’s example can help you avoid FOMO because you will not spend your time trying to follow many stocks at once. When you watch lots of stocks, you will see missed opportunities and regret them. That behavior can lead to FOMO.
An excellent way to avoid FOMO is only to follow the stocks you own and ignore everything else. Not following stocks you do not own eliminates one of FOMO’s principal causes: seeing investments you do not own making money.
The first step in controlling FOMO is to understand it. If you understand what FOMO is and how it works, you can help avoid it.