FOMO, or, “fear of missing out” when trading, applies to the anxiety of potentially passing up a profitable investment that an investor may experience. “FOMO” is a term commonly used to describe other anxiety-inducing situations as well. For investors who visualize a scenario where a stock rises sharply in value but goes unpurchased, the fear of missing out may cause them to make investing decisions that aren’t fully thought-through or in line with their investing strategy.
Making emotional, knee-jerk decisions when investing can derail your overall strategy, too. That’s why it can be important to try and avoid it the best you can.
What Is FOMO Trading?
FOMO trading happens when an investor allows their fear of missing out to 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 investment strategy, or if the stock risks could jeopardize the portfolio’s 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 overall 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 that there are so many investors who rely on social media for investment ideas, only adds more pressure to give in to your anxieties, and buy a stock or other investment that may not necessarily fit in with your investing strategy.
Ways to Avoid FOMO Trading
How can an investor fight off FOMO tendencies and remain a stable and steadfast investor? It’s not easy given the pressure to trade frequently these days, but these tips may help.
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 doing research, learning how to value a stock, and establishing your own tolerance for risk, you may be less likely to make rash or emotional decisions regarding your investments.
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 especially important to trade with strategy in mind, rather than with your feelings.
Be Sensible About Trading
A single stock market trade rarely makes or breaks an investment portfolio. If you do hear about a can’t-miss stock and are anxious to pull the trigger and buy that stock, it can help to keep it in perspective: there’s always another market opportunity down the road. In other words, keep the big picture in mind.
Avoid Investing Money You Can’t Afford to Lose
The old adage of “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, if an investment’s risk is too high, and the potential impact to your portfolio is too acute, then it may be best to wait things out.
Don’t Mistake Social Media Advice For a Sound Investment Strategy
Social media captures 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 talk up 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 type of behavioral finance — 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.That’s why it’s important to have a cogent strategy in place, and to keep your goals in mind when making investing decisions.
While it can be difficult to completely remove your emotions from your investing activities, keeping your strategy top of mind can help direct your decision-making process. Again: It’s not easy, but with some practice and experience in the markets, learning to skip investing trends might become a bit easier.
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