When choosing to make investments, it can be easy to follow the crowd and make investments based off what other investors are doing. If others are investing in this company, it has to be a good investment? However; not everyone’s risk tolerance is the same and each individual may have different investment goals. Learn more about what FOMO investing is, the psychology behind investment decisions, and how to avoid the FOMO effect.
What is FOMO?
FOMO is an acronym that stands for the “Fear of Missing Out”. This term was coined in 2004 to describe the feeling of apprehension that one’s peers are having an enjoyable experience from which one is absent. For example, a person may see a picture on social media of their friends having fun at a party they did not attend. The next time that group of friends gathers, the individual may experience FOMO and feel apprehensive toward not attending the function, for fear of missing out on the experiences. This acronym increased in popularity in the 2010s and was officially included in the Oxford Dictionary in 2013. This phenomenon has expanded into many other areas, including investing.
What is FOMO Investing?
FOMO investing is when a potential investor makes investment decisions based on what the majority of investors are doing. Shari Greco Reiches, a wealth management manager and behavioral finance expert at Rappaport Reiches Capital Management, told CNBC Make It that FOMO can lead investors to make riskier choices than they would typically make. While it can be a good idea to consult a financial expert before making investment decisions, blindly following the masses based off avoiding the apprehension of FOMO can lead to negative outcomes.
One example of FOMO investing in recent history occurred in the public market in early 2021. The subreddit r/WallStreetBets brought the stocks Gamestop (NYSE: GME) and AMC (NYSE: AMC) to the forefront of people’s minds in an effort to short squeeze the stocks against hedge funds. In the case of Gamestop, investors were encouraged via Reddit to purchase the stock and Hold on for Dear Life (HODL)* with the goal to prevent the hedge funds from sustaining gains from the stock.
*For a concise definition of Hold on for Dear Life (HODL), see our Investor Jargon blog post.
At the beginning of January 2021, Gamestop’s stock price was $17.25. At the peak, it reached a pre-market value of over $500 per share on January 28, 2021. Many individuals saw people investing in Gamestop, and some early investors had significant returns from the soar in stock price. This is an example of where the FOMO effect might have taken place, as more and more investors purchased the stock to follow the crowd. Gamestop’s opening price on May 24, 2022, sat at $94.05 per share, higher than before Reddit’s hedge, but still significantly lower than the stock’s peak of over $500 per share.
FOMO investing can occur in the private market, the public market, in cryptocurrency, and many other investing areas. It is important for investors to be aware of this subtle phenomenon and make informed investment decisions that are not based on emotions, social media, the news, or from seasoned investors.
The Dangers of FOMO Investing
Investing out of emotion may not be a sound idea and investors should research the opportunity from a practical standpoint to determine if the investment is right for their individual situation. Two examples mentioned in the CNBC article above occurred with meme stocks and cryptocurrencies, which are already inherently volatile. Investing from emotions and FOMO can lead to undesirable outcomes – either with less of a return than expected, or total loss of investment. In November 2017, the U.S. Securities and Exchange Commission issued guidance against FOMO investing, while not using that specific term. The statement read “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.” Endorsements by celebrities, athletes, or even other investors should not be the sole reason to make an investment.
The bottom line? Pressure from outside influences and FOMO should not drive your investment decisions. Just because an investment was profitable for someone else does not mean that it will be profitable for you. Investments involve risk and can result in a total loss of the amount invested. Some investors may want to speak to an investment professional to help determine their risk tolerance and goals for their individual situation.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.