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Financial advisers say the fear of missing out or FOMO can be a powerful psychological force — it can cause unwary investors to lose large sums of money.
A group of British psychologists define FOMO as the fear that “others may have beneficial experiences that I do not.” Financial advisor Josh Brown uses the term “animal spirits” to describe investing People let their emotions guide their concepts.
Today, social media platforms are a big source of FOMO, sending users information about “hot” investments such as cryptocurrencies, meme stocks, and special purpose acquisition companies, or SPACs. Influencers and pundits touting such assets claim that buyers can make a fortune, but they may hide the risks or not reveal their motives.
That’s not to say day-to-day investing always fails for buyers, it’s up to them when they buy or sell. Here’s the problem: Investors usually only hear about the big winners, not the dumb ones that advisors and pundits say they are.
Controlling FOMO “is probably the most important financial skill in today’s social media age,” Morgan Hauser, author of “The Psychology of Money,” said at the Future Proof Wealth conference in Huntington Beach, California, in September.
‘People are trying to hit a home run’
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Get-rich-slow is generally more prudent, because investments with great growth potential also tend to take more risk and therefore have a greater chance of loss, said Joseph Burt, a certified financial planner who serves as the company’s chairman and CEO. Certified Financial Group.
“People are trying to hit a home run and it’s like [winning] The lottery in investing,” said Burt, whose Altamonte Springs, Fla.-based firm was ranked No. 95 on CNBC’s 2022 Top 100 Financial Advisors list.
It’s relatively easy for investors to make money in 2021, a year when most asset classes seem to have nowhere to go but up. Strong stock and crypto gains have created a million new millionaires.
Various hype men and women and the social media community helped drive investors to buy in last year.
For example, Bitcoin price could surge 20% or more in a day after Tesla and SpaceX founder Elon Musk tweeted; a Feb 2021 tweet Giving Dogecoin (another cryptocurrency) an ordinary human quality, calling it “the people’s cryptocurrency”.
The WallStreetBets community on Reddit has also sparked a frenzy over meme stocks like GameStop and AMC. Rapper and music producer Jay-Z, NBA player Stephen Curry, tennis superstar Serena Williams and other celebrities have also backed certain SPACs — quasi-IPO investments — which until recently were Wall Street One of the hottest trends.
Depending on when investors buy and sell, FOMO can cost them big bucks.
For example, the price of Bitcoin reached nearly $69,000 in November 2021, more than tripling in a year. Since then, it has fallen to around $19,000, where it was before the sharp rise. Extreme volatility in GameStop’s stock has caused the share price to drop by as much as 40% in half an hour at times.
The Securities and Exchange Commission issued an investor warning last year about celebrity-backed SPACs.
“Celebrities, like everyone else, may be lured into venture capital investments, or may be better able to withstand the risk of loss,” the SEC said. “It’s never a good idea to invest in a SPAC just because a well-known sponsor or investment in a SPAC, or it’s a good investment.”
The CNBC index, which tracks SPAC deals, is down more than 60% over the past year.
“I think very few people understand their risk tolerance and feelings of regret about the future until things get worse,” Hauser said, adding that everyone has a high risk tolerance in a bull market.
How Advisors Can Overcome Investor FOMO
Eliminating future regrets is how top financial advisors try to dissuade investors from succumbing to FOMO.
If clients want to move large amounts of money into “FOMO assets,” chief investment officer Aldo Vultaggio said. Capstone Financial Advisors with whom he likes to discuss their likelihood of successfully achieving certain financial goals with and without these assets. Based in Downers Grove, Illinois, the firm is ranked No. 77 on CNBC’s Top 100 Financial Advisors list.
In other words, if the client is ready to have enough money to retire comfortably or afford a child’s college education, why take a bigger risk?
Fear of future failure helps deter clients from making short-term investments — or at least reduce their overall allocation to short-term investments.
“Why invest in these speculative assets? They usually want to do it because they might get higher returns,” Vultaggio said. “But if you don’t need to do that, why would you do that?”
“The ship is succeeding here,” he added. “We want to avoid things that could throw you off course.”
Vultaggio told clients who insist on FOMO-type allocations to risky assets that they should generally limit their positions to a low single-digit percentage of their total holdings and that they should not invest the funds they need. In the near or medium term, he said.
Investing in stocks, bonds and other asset classes always comes with some risk — but it’s a calculated risk, usually with a track record of success over a long period of time, says Madeleine, a financial advisor at California Financial Advisors. Malone said the firm, based in Ramon, Calif., is No. 27 on CNBC’s Top 100 Financial Advisors list.
“We need something that we have a game plan for, and these hot stocks, cryptocurrencies, whatever it is, [clients] Gotta know it’s their gamble,” Malone said. “It’s not a pension we want to rely on. “