Invest smartly, don't let FOMO fool you

A 2021 study by Barclays found that approximately 67% of investors admitted to making investment decisions impulsively rather than long-term strategy and then regretted it. Best example is in the late 1990s, the rise of internet-based companies led to a surge in investments in tech stocks. As stock prices soared, more investors, driven by FOMO, poured money into these companies without due diligence. The bubble burst in the early 2000s, leading to significant financial losses for many investors who had joined the frenzy without assessing the underlying value of these businesses. Similarly, cryptocurrencies have seen several cycles of explosive growth and subsequent crashes. A notable instance was in late 2017, when Bitcoin's price skyrocketed, drawing in a flood of new investors driven by FOMO. However, the market corrected sharply soon after, resulting in substantial losses for those who had invested near the peak.

Hidden dangers

When FOMO takes over, investors often make decisions that prioritize immediate excitement over long-term financial health. Here's why chasing the latest market trends can be problematic:

The inflation illusion: FOMO often drives investors towards assets that seem to be skyrocketing in value. This rapid price appreciation can create a false sense of security. The problem is when everyone rushes to buy, asset prices may become artificially inflated, far exceeding their true value. When the hype inevitably subsides, such overvalued assets are much more likely to experience a sharp correction, potentially wiping out significant gains. This phenomenon was recently witnessed in the Indian stock market when a record-breaking 4.2 million new demat accounts were opened in December 2023 alone, suggesting a surge of investors potentially driven more by hype than by fundamental analysis.

Following the herd blindly: When investors blindly follow the crowd, it amplifies the very trend they're chasing. This herding behaviour contributes to market volatility, causing potentially exaggerated price swings in either direction. The risk here is that these sudden reversals can be brutal when sentiment shifts, leaving investors holding the bag. Focusing solely on immediate gains is a slippery slope. It discourages the kind of patient, researched approach vital to long-term financial success. Investors who are more disciplined and focus on the underlying fundamentals of businesses and assets often achieve greater returns over time.

Emotions at the wheel: FOMO thrives on excitement and the fear of being left behind. Unfortunately, this means rational analysis can take a back seat, leading to impulsive decisions fuelled by anxiety or greed. It's hard to make smart financial choices when your emotions override all other considerations. When many investors act based on FOMO, the overall market can become more unpredictable. Sudden bursts of enthusiasm in a particular stock or sector can inflate prices quickly, followed by equally jarring declines. This volatility makes it much harder for investors to rely on established strategies and heightens the chances of losses.

Time-bound decisions

The "act now or miss out forever" narrative is a classic FOMO tactic. When faced with such pressure or advice, it's vital to take a step back. Reputable investments rarely come with such artificial scarcity or time limits. Solid fundamentals underpin true opportunities and often endure over extended periods. High-pressure sales pitches and limited-time offers are best avoided.

Strategy vs. opportunity

Many investors and entrepreneurs struggle to balance a well-defined strategy with the allure of a seemingly unique opportunity. The excitement of the moment can overshadow a disciplined, long-term approach. Striking a balance is key. One way to do this is by establishing clear criteria within your broader strategy that guide how you evaluate opportunistic plays – this might include allocating a small percentage of your portfolio to higher-risk, high-potential investments after careful research. This allows you to explore opportunities without derailing your overall financial goals. It is essential to remember that true alpha isn't about stock picking, frequent trades, or market timing. It's generated through intelligent asset allocation. Remember, if it sounds too good to be true, it almost always is. Sadly, the financial world isn't immune to those seeking to exploit the FOMO mentality. From questionable social media influencers promoting the next "sure-thing" to seemingly sophisticated but ultimately fraudulent schemes, there's no shortage of traps designed to prey on investors' desires for quick wins.

Conclusion

Smart investing requires overcoming the urge for immediate gratification. Making sound financial decisions involves a healthy dose of skepticism, careful research, and a commitment to a well-defined strategy. By understanding the dangers of FOMO and sticking to proven principles, you can avoid costly mistakes and lay a strong foundation for your long-term financial well-being.

Tarun Birani is founder and CEO of TBNG Capital Advisors