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FOMO Kills Investors. Here’s How Top Advisors Avoid The Risks
Financial experts believe that fear of missing out (FOMO) might lead to significant financial losses for unsophisticated investors.
FOMO is the fear that others are having fun while you’re not. Josh Brown calls emotional investors “animal spirits.”
Social media networks flood users with messages touting “hot” investments like cryptocurrencies, joke stocks, and SPACs. Influencers and experts who promote such assets may gloss over risks or fail to reveal their intentions.
Depending on when purchasers buy and sell, flavor-of-the-day investments aren’t always flopped. Advisors and experts say investors only hear about big wins, not duds.
FOMO-control Morgan Housel, author of “The Psychology of Money,” said in September at the Future Proof wealth conference in Huntington Beach, California.
“It’s better to “become rich slowly” than to invest in high-risk, high-reward ventures”, says Joseph Bert, chairman, and CEO of Certified Financial Group.
Most asset classes rose in 2021, making it easier for investors to profit. Stock and cryptocurrency gains created a million millionaires.
Last year, hype-men and -women and social media helped investors buy.
Elon Musk’s tweets can cause bitcoin values to jump by 20% or more in a day; in February 2021, he called dogecoin “the people’s crypto.”
The WallStreetBets Reddit forum hyped meme stocks like GameStop and AMC. Jay-Z, Steph Curry, Serena Williams, and other celebrities have backed SPACs, which were Wall Street’s trendiest craze until recently.
FOMO may have cost investors significant sums, depending on when they purchased and sold.
Bitcoin hit $69,000 in November 2021, tripling in a year. Since then, it’s fallen to $19,000, about the same as before its runup. GameStop stock fell 40% in a half hour due to extreme volatility.
SEC warned investors about celebrity-backed SPACs last year.
“Celebrities, like everyone else, can be persuaded into investing in a dangerous venture or may be better able to absorb the risk of loss,” the SEC added. “It is never a smart idea to invest in a SPAC just because someone prominent endorses or invests in it or believes it is a good investment.”
“Few individuals grasp their risk tolerance and sense of future regret until things go south,” said Housel, adding that everyone has high-risk tolerance in a bull market.
How advisors beat FOMO
Top financial planners use future regret to discourage FOMO.
Aldo Vultaggio, a chief investment officer of Capstone Financial Advisors, prefers to discuss with clients the likelihood of accomplishing financial goals with and without “FOMO assets.”
If a customer is on track to retire comfortably or pay for college, why accept more risk?
Fear of failure discourages clients from making short-term investments or reduces their overall allocation.
“Why buy speculative assets? They normally want to do that because they may potentially receive a bigger return,” said Vultaggio. “But if you don’t need to do it, why would you do it?”
“We’re on track,” he said. “We want to avoid detours.”
Vultaggio encourages clients who are determined about holding a FOMO-type allocation to a hazardous asset should limit their position to a low-single-digit proportion of their overall holdings and not invest money they’ll need in the near or intermediate term.
Investing in stocks, bonds, and other asset classes always includes some risk, but it’s a calculated risk with a long track record of success, said Madeline Maloon, a financial advisor with California Financial Advisors in San Ramon, California.
“We need something we have a game plan for, while these hot stocks, crypto, whatever it may be, [customers] have to recognize this is their gambling money,” Maloon added. This isn’t enough for retirement.
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