While Investment FOMO Is Natural, It Can Lead to Intolerable Risk

At some point in time, we have all experienced the sinking, borderline painful feeling of missing what would have been an enjoyable experience or positive situation. Commonly referred to as FOMO, the fear of missing out often causes some level of emotional distress as we imagine what positive outcome or difference may have come from whatever it is we did not take part. In some instances, our response to this feeling of FOMO may even lead us to alter our behavior moving forward, which can be particularly precarious when applied to investing. In this three-part series, I’ll aim to link this experience and its ensuing potential behavioral alterations to possible investment pitfalls, specifically those present when investing in crypto-currencies/crypto-assets.

Part I will focus on the FOMO moving forward, and the potential emotional and behavioral impacts it may have on one’s investment philosophy and practices. To start, gaining further understanding of this emotion is imperative to combating it. Investment FOMO lurks in the shadows of every investor’s thought process, discipline, and strategy. The fear of missing an opportunity to achieve goals can quickly push an individual to take unnecessary risks. I link an investor’s personal method to the bumpers deployed when bowling. With the guardrails set, the ball can deviate down the course of the lane with a dramatically increased chance of it knocking down some or all the pins. It may seem a slightly on-the-nose simile, but the same is true in the realm of investing. Discipline and philosophy guard the investor from poor decisions that may negatively impact returns. Deviating outside of one’s own plan increases exposure and risk, often dramatically, and can negatively impact overall performance.

Market euphoria is the breeding ground for investment FOMO. Investors observe a meteoric rise in a particular company or position and want to “ride the wave” in pursuit of quick profits. A perfect example of such behavior involves the recent rise of the company Gamestop. From Jan.12-27 of this year, Gamestop’s stock rose from $19.95/share to $347.51/share, representing an increase of 1,641.90% in 15 days; only to fall nearly 90% from the high just under a month later. This momentum and the ensuing euphoria was almost entirely generated by conversations stemming from an online Reddit forum called WallStreetBets. Once the stock started soaring, news began reaching those unfamiliar with the WallStreetBets forum, causing many investors to purchase the stock late and near or at the peak, ultimately leaving them holding the bag and incurring heavy losses as the stock price plummeted. A similar argument can be made for the recent attention and focus paid to crypto-currencies, particularly the dramatic rise in the value of crypto-assets such as Bitcoin and Ethereum, which will be further explored later in this series.

It is tricky to provide perspective on these situations without completely condemning investors on either side. The point is certainly not to criticize those making such swift choices, but rather to highlight the risks involved when straying from set investment discipline, and to provide potential solutions to check the allure of market euphoria. By maintaining an underlying foundation of stoicism in their approach, investors can prevent succumbing to FOMO and taking intolerable risks. Simply put, stoicism represents an area of philosophical thought pertaining to the pursuit of proper action by decoupling emotionally charged responses from the circumstances one encounters. Marcus Aurelius, Roman emperor and revered Stoic philosopher stated, “The first rule is to keep an untroubled spirit. The second is to look things in the face and know them for what they are.” Applying this basic tenet of Stoic philosophy to investing focuses the lens through which investors view their subjective approach. The more FOMO can be diminished, or even completely removed, the more sound an investment decision becomes. This, in turn, decreases the potential of encountering unnecessary risk.

As we encounter occurrences of such market euphoria, it is important to measure them appropriately and view them for what they are. Though they offer chances for great return, the accompanying risk must not be ignored. FOMO rears its ugly head when these events are irrationally perceived as the last opportunity to ride the wave. There will be opportunity in the future for one to achieve their investment goals; however, maintaining a disciplined approach while adhering to the guardrails of their philosophy is imperative to ensuring those objectives are achieved.

Ryan Burns is a financial advisor for CapWealth. For more information about Burns and CapWealth, visit capwealthgroup.com.