4 tips to avoid FOMO when investing
The fear of missing out (FOMO) can cause individuals to make irrational decisions that harm their investment plans. Find out how to avoid FOMO as an investor.
Fear of missing out (FOMO) is the fear that someone else is doing something better or more interesting than you are. It’s a common human emotion that’s become much more prevalent recently with the popularity of social media and reality TV shows.
How FOMO affects investors
FOMO can have a big impact on you as an investor. When colleagues or friends boast of windfall profitsProfits A financial gain for a person or company. Equals the money left over after you subtract your costs from the money you made.+ read full definition on the stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition, it can cause you to feel envious, dissatisfied with your returns, and question your own investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition strategy. This fear can affect your decision making and potentially derail your investment plan.
4 tips to avoid investing FOMO
1. Be cautious with hot tips
Investment websites, industry experts, TV shows, colleagues and even family members may all tout the latest tipTip The sharing of important information about a company not known to the public.+ read full definition for the next big thing. Don’t succumb to FOMO and jump into an investment without understanding how it works or the risks. Do your own research and take the time you need to determine whether the investment is worth it or not and fits with your financial goals.
2. Create a financial plan and stick to it
Think about the short-and long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition financial goals you want to achieve, your time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition and your tolerance for risk. Create a financial planFinancial plan Your financial plan should cover every aspect of your finances: saving and investing, paying down debt, insurance, taxes, retirement planning and estate planning.+ read full definition that will help you achieve those goals, and then follow it. Read more about What your financial plan should cover.
3. Overcome your behavioural biases
Whether we’re aware of it or not, there are behavioural biases that can influence our reaction to FOMO. Here are two of the most common ones:
- Confirmation bias – We have a tendency to look for information that supports our beliefs and affirms that our point of view is correct. Read more about confirmation bias.
Solution: Seek out information that contradicts what you think about a particular investment.
- Overconfidence – Research shows that many people are overconfident in their own investing abilities. We may recognize that, on average, most people can’t “beat the market” by trading frequently. But somehow we feel that we’re the exception. Read more about overconfidence.
Solution: Give yourself a reality check. Even professional investment advisers may struggle to achieve better-than-market returns.
4. Take a long-term view
For most investors, investing to achieve goals is a long-term pursuit. Wealth builds gradually over time, rarely overnight. Resist the temptation to panic at bad news or chase after the latest craze. Focus patiently on achieving your plan and avoid making decisions out of fear of missing out.