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A few years ago, I’d finally begun feeling pretty good about all of my investments. My portfolio was growing steadily, and I was starting to think I might actually have a knack for this whole finance thing. That is, until a friend of mine told me about this hot new stock called KarmaCo* that was supposedly going to change the world in the coming decade.
My friend had already invested in it, and was seeing huge returns. I'll admit I got a bit jealous. So I did some research of my own, and got swept up big time in FOMO. I mean, this stock was so hot, I needed oven mitts just to touch my computer screen.
So, I threw caution to the wind and invested a sizable chunk of my savings into this stock.
Well, you can probably guess what happened next. The stock ended up plummeting faster than a bowling ball thrown off a fast-descending plane. I lost a fair bit of money, and my dreams of early retirement were dashed faster than you could say “sell, sell, sell!”
Looking back on it now, I can laugh at how absurd the whole situation was. I was like a squirrel chasing a shiny object, and I forgot about the nuts I’d already collected. But this incident taught me an invaluable lesson about the dangers of FOMO and the importance of sticking to a solid investment strategy.
Oh and also: maybe don’t take investment advice from friends who think “YOLO” is a sound investment strategy? 😂
Where FOMO comes from
“Fear of missing out single-handedly caused every single investment bubble in human history. No other emotion is more powerful than FOMO.”
― Naved Abdali (Author of INVESTING: Hopes, Hypes, & Heartbreaks)
All of us have a natural desire to belong, to be well-liked and respected, and to be “with it”. And when you think about it, this makes perfect sense, since these are vital concerns for any member of a highly social species. However, this desire also has a dark aspect to it that’s usually simmering just under the surface.
This is perhaps most commonly seen in the obsession many people have with the rat race (i.e. the phenomenon of wanting your kid to outshine Sharmaji’s beta). And social media getting added to the mix is like a mean pit bull getting a massive shot of steroids: things are going to get real nasty real soon.
And that’s how you end up with FOMO, which is when this benign desire to fit in and matter socially gets cranked up to an eleven and starts to hurt you. And what started out in the social sphere has been making inroads into the investing space for a while now, thanks to several kinds of asset classes (crypto, meme stocks, “multibagger stocks”, etc.) seemingly delivering super-mega-hyper returns.
With everyone from pimple-faced podcasters to your neighbour’s bedridden grandmother talking up The Next Big Thing™ that’ll make you a crorepati in just a couple of weeks, it can be difficult indeed to resist the urge to say “YOLO” and go all in on a high-risk-high-reward bet!
To get some perspective, check out this humorous take on this urge:
Why acting on FOMO is a terrible idea
But there’s no two ways about it: for the sake of your financial health (and hence your physical health as well!), you simply cannot go around giving in to such tempting situations. And let’s face it, the rational part of your mind is also fully aware that succumbing to FOMO is dangerous, but your lizard and monkey brains can often raise enough of a racket to drown out that part’s concerns.
So why exactly is FOMO-ing into a speculative investment (isn’t that an oxymoron? 🤔) a bad idea? Well, I can think of at least three great reasons:
1. The bubble risk
If some asset or asset class has delivered returns that are high enough to make you feel FOMO, then there’s also a good chance that a bubble is at play, one that could pop at any moment. Bubbles resulting from irrational behaviour have been around for centuries, if not more (remember the Dutch tulip mania?), and have wreaked havoc on investors’ lives for just as long.
You might think, “It’s different this time!”, but that’s exactly what investors in previous bubbles thought right before they lost significant sums of money as well! So don’t rely on magical thinking when what you really need is rational thinking.
2. The timing risk
There’s a very good chance that an asset that’s delivered great returns will come on your radar only after all the big gains are over, and after all the smart people have exited. So even if the newspaper headline screams that KarmaCo delivered 32X returns over twenty years, does that mean you should get in right now? Well, it might still be a decent stock, but if you buy it expecting sky-high returns, you might end up sorely disappointed.
Because in the markets, anything can happen.
3. The risk of losing your head
As the Hindi adage goes, ‘Sir salaamat toh pagdi pachaas’ (As long as your head is intact, you can put on fifty different hats). And through a funny coincidence, the word ‘capital’ also derives from the Latin word for ‘head’! So in investing as well, you absolutely can’t afford to lose your head, that is, your capital.
The irrationality brought on by FOMO can lead you to invest sums that are far more than what you can afford to lose. So don’t let your portfolio plateau or crater for a long stretch of time just because an easily excitable news presenter raved about an “up-and-coming” stock that you’d never even heard about before.
Remember that if your bets don’t work out, your entire portfolio could end up looking like a botched case of plastic surgery for several years.
FOMO psychology
OK, so FOMO = bad, but how exactly are you supposed to wrest back control from the powerful lizard + monkey brain combo once it’s hijacked your thoughts?
At this point, I could wax eloquent about self-improvement and self-control, mindfulness and meditation, Zen and Stoicism, and Dale Carnegie and Deepak Chopra, but let’s get real: making lasting and effective changes to deep-seated psychological habits is EXTREMELY hard.
Sure, you could retire to the forest, master yourself, and then come back to society twenty years later to make well-considered investments in the best asteroid mining and Mars tourism companies. Or you could stay right where you are and simply learn from the kids who aced the marshmallow test.
What am I on about? Well, the marshmallow test was designed to test delayed gratification among children: they were left alone for some time with a marshmallow in front of them, and if they resisted eating it, they’d be rewarded with two. What’s of interest to us here is that several kids who passed the test used a rather elementary strategy to distract themselves: they simply looked away from the marshmallow. Out of sight, out of mind indeed!
Here's an actual video of the test being conducted. A must watch, if you want to understand investor psychology.
So, in the face of risky opportunities where you’re worried you might do the wrong thing, simply “looking away” from them could be a good idea. And the best way to do so is to delegate most of your investments to trusted professionals who’re sworn to look after your best interests.
How to tame the FOMO demons
Thus, instead of chasing after individual stocks that may or may not be multibaggers and may or may not put you on the cover of Forbes, what you could do is simply allocate most, if not all, of your investable funds to a mutual fund consisting of large-cap stocks, or even several different mutual funds invested in different asset classes (yay, diversification!).
That way, you can sleep easy knowing that regardless of the crazy tumult that might shake the markets up on any given day, your money will always be in safe hands, and will continue to grow over the long run. You might still feel some FOMO, sure, but if you’re already mostly invested in mutual funds, you won’t be able to act on it.
Or you could give your FOMO a small outlet by adopting an “itch, but only when it itches strategy” for your portfolio: place 80-90% of your investable funds (i.e. the “core”) in mutual funds, and use the rest (i.e. the “satellite”) scratching your FOMO itch if and when it arises. This way, you can get the best of both worlds: there’s little chance of getting wiped out, but you can still take some speculative bets from time to time.
And why should you opt for mutual funds as your main investments? Well, because mutual funds are collections of several different stocks and/or securities, which makes them resilient to the ups and downs that any individual stock might face.
By the way, how can you choose an intelligent mix of mutual funds suited to you? Let our automated risk assessment tool SARTHI help. Click below to access the tool for free!
Or if you prefer to speak with an expert who could guide you, fill out this form to request a call back.
The nirvana of JOMO
Remember that friend of mine who first told me about KarmaCo? Well, when that stock crashed, he ended up losing all his gains, but the thrill of the whole process affected him for a long time to come: the anticipation of a windfall completely warped his decision-making.
However, once I’d seen the light, I decided to take a drastic measure to snap him out of it: I invited him out for a lunch where, unbeknownst to him, I’d also invited our entire friend circle so we could carry out an intervention! Thankfully, my ambush proved successful, and he turned over a new leaf soon after.
And from that point on, he started referring to me as his personal Socrates, and even gifted me a bust of the philosopher in gratitude. It remains one of my most prized possessions to this day!
So the next time you hear that a stock has gone up 21,400% and start kicking yourself for not picking it up sooner, stop and take a deep breath. Remind yourself that you don’t have to get caught up in all this drama, and that all these apparently incredible opportunities are also incredible risks.
And once you’ve decided to entrust the growth of your investments to reliable experts, you can start to revel in the fact that hype and breathless news anchors no longer hold any sway over you. Replace your adrenaline rushes with a steady base via mutual funds, and replace FOMO with JOMO: the joy of missing out!
* This is a fictitious name: any resemblance to any past or present company is purely coincidental.
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