Vet your investment choices. Avoid FOMO based decisions!
FOMO can be best described as a state of anxiety triggered by the feeling or perception that others may be having more fun in their lives than you, experiencing better things and you are missing out on them. FOMO made its way into the vocabulary of millennials and the younger generations owing to the burgeoning importance of social media in their lives – you only feel a sense of being left behind once you are acutely aware of what others may be doing, experiencing or achieving.
This compulsive concern often leads to behavioral patterns attuned to catching up with what your peers may be doing even if it may not be in the best of your interests. In a social media obsessed world, it is a common occurrence for people to let their feelings of FOMO colour their approach towards finances. For instance, watching others amass substantial wealth in a short span of time due to a rally in the market can make you feel a sense of compulsion to follow their steps in the hope of making similar gains even though the opportunity may have passed or the move may not be suitable for your risk appetite. In other words, FOMO can push investors to make riskier moves than they would have otherwise made.
“FOMO can be such a strong influence on your day to day life that even if you are aware that many of your life choices are simply rooted in a desire to fit in and follow the herd, you cannot stop yourself from going in that direction. The early days of my investment journey were heavily driven by feelings of FOMO – in fact, it is somewhat ironic that my initiation into a disciplined investment routine was also partially rooted in FOMO. However, it was only after I lost a chunk of my money that I realised that investing money by looking at what’s trending on social media can spell doom for your financial goals,” narrates Harsh Kumar (name changed), a 32-year-old graphic designer based in Delhi.
The effects of social media-induced FOMO can get amplified if you have friends and acquaintances who seem to be riding on the same wave. Their financial success stories may foster a misplaced sense of confidence and you may end up following erroneous investment advice because of the belief that if they have been able to reap benefits, so can you. “My stint as a cryptocurrency investor was a turning point in my investment journey. Thanks to the all-pervasive crypto buzz and the notion that it could be an easy way of capital appreciation, I went about pumping money in crypto coins like a headless chicken. Barring a few brief spurts where I actually made gains, overall I lost a sizable chunk of my savings in it,” narrates Kumar.
A bull run in an asset class that starts getting attention on social media can be the perfect recipe for fueling a FOMO based investor movement. For instance, last year the Gamestop trading frenzy highlighted the dangers posed by social media for amateur investors. However, investors who are sold by the idea of making a quick profit in the midst of a charged atmosphere should deliberate on the repercussions they would have to endure should their investment moves turn out to be a disaster. FOMO based investment decisions are purely equivalent to a gamble because no one can accurately guess the span of a rally and often markets can be driven by expectations of investors rather than on actual historical data.
Preeti Zende, co-founder of Apna Dhan Financial Services says, “In today's hyper-connected world, everyone wants quick results, be it fame, success, or money. In terms of money, the post COVID share market was perceived by many as a place to earn quick bucks for short term goals. Majority of these investors are those who have either just started earning or have spent only a few years in the investing world.”
“When such investors think of share market investing as something of a conduit for earning easy and quick money, they miss out on understanding the basics of the functioning of the share market. When you invest in an equity asset class through a stock purchase or equity mutual funds you are buying parts of those businesses. For sustainable wealth, companies need time to grow. Short-term speculative market movements tempt such investors to see only short-term gain and deprive them of the opportunity to create long-term wealth,” she explains further.
Many investors also tend to overlook the fact that for booking short-term profits, it is imperative to take into account the entry level scenarios. By blindly simply jumping on to a bandwagon when a particular stock or asset class is being glossed over, can set you up for troubling times ahead. Zende elaborates, “To book a short-term profit entry-levels matter a lot. For example, when the markets crashed two years ago and then bounced back after some months, many millennials thought they had missed the chance to earn short-term profits. However, there is no way to predict market movements – it is impossible to decode when a bull run will start or when the market is turning into a bear run. Timing the market is impossible for even experts. When we give more importance to short-term gains we end up feeling FOMO with each correction but historically it has been proven that in long run it really does not matter at what market level you have invested your money. The time spent in the market matters a lot more than timing the market.”
- Seeking professional financial advice on a regular basis can help you in filtering the noise. Your investment advisor can be a sounding board whenever you feel too carried away by FOMO.
- Sometimes putting your thoughts into words to a trusted confidante who understands the investment gamut can help you gain clarity on whether your assertions are sensible and would benefit you in the long run.
- When we give more importance to short-term gains we end up feeling FOMO with each correction but historically it has been proven that in long run it really does not matter at what market level you have invested your money. The time spent in the market matters a lot more than timing the market.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.