THE PSYCHOLOGY OF FOMO AND INVESTING IN A RALLY
As equity markets around the globe surge, the mood among investors often shifts from cautious optimism to euphoric urgency. Headlines trumpet record highs, social media buzzes with success stories, and suddenly, everyone seems to be making money, except you. This is the moment when one of the most powerful emotional forces in investing takes hold, the Fear of Missing Out (“FOMO”). In this month’s Financial View, we look at this emotional bias that may drive individuals to make impulsive, irrational decisions to join a “hot” market trend out of anxiety that they will be excluded from potential profits.
FOMO is not a new phenomenon. It’s deeply rooted in human psychology, in our tendency to compare ourselves to others, to seek validation, and to avoid regret. In the context of investing, FOMO can lead to impulsive decisions, poor timing, and ultimately, disappointing outcomes. If everybody is doing it and making a success of it, why shouldn’t I (following the herd and being one of the sheep)? Understanding this emotion is key to navigating market rallies with clarity and discipline.
Why FOMO Strikes Hard During Rallies
Market rallies are fertile ground for FOMO. After periods of stagnation or decline, a sudden upswing feels like a reward, which it is but only for those who were already invested. For those sitting on the sidelines, the rally can feel like a missed opportunity. The longer the rally continues, the louder the internal voice becomes, “I should have bought earlier. I’m falling behind. I need to get in now.”
This urgency is compounded by the visibility of others’ success. Whether it’s a friend boasting about their tech stock gains or a financial influencer touting their portfolio returns, the perception that “everyone else is winning” can distort our judgment. We begin to chase performance rather than follow a plan.
The Risks of FOMO-Driven Investing
Investing based on FOMO often leads to buying high, the exact opposite of the “buy low, sell high” mantra. When prices are inflated by enthusiasm rather than fundamentals, the risk of a correction increases. Investors who jump in late may find themselves holding assets that quickly lose value, triggering panic and potentially locking in losses.
Moreover, FOMO can erode long-term strategy. It encourages short-term thinking, frequent trading, and emotional decision-making. Instead of building a diversified portfolio aligned with your personal goals and risk tolerance, investors may concentrate their holdings in whatever is currently “hot,” increasing exposure to volatility.
Historical Lessons of FOMO in Action
History offers plenty of cautionary tales. The dot-com bubble of the late 1990s saw investors pile into tech stocks with little regard to the profitability of the underlying stocks. The 2008 housing bubble was fuelled by speculative buying and the belief that prices could only go up. More recently, the meme stock frenzy of 2021 showcased how social media-driven FOMO can inflate prices far beyond intrinsic value.
In each case, those who entered late, driven by fear of missing out, often suffered the most when the bubble eventually burst.
How to Manage FOMO
The antidote to FOMO is a clear, disciplined investment strategy. Here are a few principles to help investors stay grounded during market rallies:
- Know Your Goals
Investing is personal. Define what you’re investing for such as retirement, education, wealth preservation and let those goals guide your decisions. - Stick to Your Plan
A well-constructed portfolio should reflect your risk tolerance and time horizon. If your plan includes equities, ensure your exposure is appropriate, not reactionary. - Avoid Herd Mentality
Just because others are investing doesn’t mean it’s right for you. Be wary of trends driven by hype rather than fundamentals. - Rebalance, Don’t Chase
If your portfolio has drifted due to market movements, consider rebalancing rather than chasing performance. This helps maintain your intended risk profile. - Stay Educated
Understanding market cycles, valuation metrics, and behavioural finance can help you recognize emotional triggers and make sure you respond rationally.
Turning FOMO into Opportunity
Interestingly, FOMO can be a signal, not to buy, but to reflect. If you’re feeling left out, ask yourself why. Are you underinvested? Is your strategy too conservative? Or are you simply reacting emotionally? If you have had an exceptional run perhaps its time to bank some profit and let the profit sit on the sidelines.
Use this moment to review your financial plan. If adjustments are needed, make them thoughtfully. If your plan is sound, trust it. During your lifetime, the market will have many rallies and many corrections. Staying invested, staying diversified, contributing monthly through both up and down cycles and staying disciplined is the best way to ensure you benefit from both.
Recent Comments