FOMO, or Fear of Missing Out, can compel investors to make reckless decisions, but understanding its influence may help you stay disciplined.
Slow news days offer few distractions, so traders might be more likely to stay with their usual routine. Lately, though, slow news days are seemingly harder to find. Between trading halts, high volume, and controversial short squeezes, the stock market has piqued the curiosity of new traders and roused veteran traders to reconsider their plans.
When the news is exciting, traders might be eager to search for new opportunities. After all, identifying promising patterns early has the potential to lead to profits. However, for some investors, the adrenaline of these moments can overshadow the risks.
The Fear of Missing Out, or FOMO, is a name for the anxiety of missing a perceived opportunity. In the case of the stock market, this usually means investing in a security that others believe will make money.
When certain ideas become more popular, many traders find emotional security in sharing the same strategy as others. Our minds tend to perceive decisions outside the norm to be more dangerous, even if the bandwagon’s consensus is based on instinct instead of evidence. Yet making decisions based on this bias can be precarious.
FEAR OF MISLEADING OPPORTUNITIES
Much like your social media feeds are filled with filtered images and motivational captions, people are more likely to share their success stories than their failures. Whether these come from your personal network or the platforms of influential finance experts, the absence of context for these experiences may mislead investors. Some figures in financial media may even have ulterior motives when they recommend certain stocks.
Another reason why FOMO-fueled investing can be problematic is the timing. By the time these trends generate enough headlines to garner attention, many investors may be chasing a fad rather than riding the wave. As an example, this could mean buying a security when its price has peaked instead of buying the dip. Past returns do not guarantee future returns.
Lastly, FOMO often compels traders to act on impulse rather than logic. Making decisions based on emotions rather than taking an organized approach can increase risk.
Anxiety about passing on potential opportunities is natural, and some popular ideas may even lead to profitable returns. The risk with FOMO is not experiencing the emotion itself, but how we react to it. Whenever the urge to join the herd strikes, these methods may help limit your vulnerability.
Many investors swept up in speculative bubbles neglect to adequately research their investments. Investors active during the dotcom bubble were right when they predicted the future omnipresence of ecommerce, but not every company with a “.com” in its name had a fully developed business plan.
Prioritize what’s important
Ask yourself how these prospective investments would fit into your portfolio and determine the amount you are willing to risk for them. If you don’t need that high speculative return to meet your investment goals, then there may not be much value in taking on a high speculative risk.
See the bigger picture
A stock’s current price is just one component of determining its value for your investment goals. Several factors can influence prices to change, and without understanding those other factors, recent price history can be misleading. Moreover, an overall bullish or bearish mood from the market may influence that security, regardless of its individual characteristics. Investors should consider all of a stock’s fundamentals in addition to price movement.
Be critical of the source
Are you joining a broader trend, or were you motivated by one person who shared his success story online? Anecdotal evidence may not be indicative of your performance. By the same token, choosing credible sources and following more than one source of information may help confirm (or debunk) market trends. Consulting multiple insights may help you avoid decisions ruled by confirmation bias.
Review your trading journal
Before jumping on the bandwagon, take a look at your recent performance. If you’re hitting your goals, you may appreciate your current strategy. If your trading plan isn’t helping you reach your targets, try to identify the components of your plan that are holding you back. Abandoning your strategy on impulse can be jeopardous, but reevaluating your strategy may be helpful for traders who are looking to evolve their trading.
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