FOMO: Don’t Let Fear and Greed Drive Your Investment Decisions

The wild ride that was GameStop stock is simply the latest example of irrational investing driven in part by fear – in this case, the fear of missing out.  At its core, FOMO leads to poor decision making by investors – from professional to novice.

Platforms like Robinhood seek to democratize investing by providing access to investing to every person with a smartphone, an idea I completely support.  Where I get concerned is when this convenient access intersects a steady stream of social media stories about how other people are getting rich quick.  It is a recipe for FOMO based decisions.  

As humans, we’re already flawed decision makers - fear, greed and envy just magnify the situation.

Most investors are familiar with the timeless market advice to “buy low, sell high.” But FOMO driven decisions lead us in the opposite direction by driving investors to chase returns of hot stocks based on the wild success they see their friends posting.  The faster these stocks soar, the more investors want to join the party. 

What gets lost in the hype is that just because someone else made bank by trading options on GameStop, doesn’t mean everyone will.  For every person who scored big on GameStop, there is someone who lost it all.  We witnessed firsthand how keeping up with social media “Joneses” without a full understanding of the risks associated with leveraged investments led to runaway greed and poor decisions.  

Just because the market is racing onward and upward now, doesn’t mean it will continue on that trajectory forever.

Basic market history confirms that what goes up, must come down. In the past 90 years the US stock market, represented by the S&P 500, has generated positive returns in two out of every three years.  Of course, the corollary to this is that one out of every three years the market ended the year in negative territory.  In the short run, that can feel like a roller coaster, but in the long run the market has continued to make gradual, upward progress.  Over these same 90 years, the S&P 500 has earned an average return of 10 percent.

“Be fearful when others are greedy, be greedy when others are fearful”  -   Warren Buffett

Warren Buffett, one of the greatest investors of all time, has his own take on fear and greed that reinforces the wisdom of buying low and selling high.  One of his most popular tidbits of investment wisdom is: “be fearful when others are greedy, be greedy when others are fearful.”  We’ve seen this logic play out in both directions in the last twelve months.

The best investment opportunity in more than a decade occurred at the end of March when millions of investors fled the market in fear of the potential impact of COVID-19 on the American economy.  Buying stock when the S&P 500 is suddenly down 34% is the stock market’s equivalent of Black Friday bargain shopping.  Everything’s on sale, not just the leftovers from last season.

 In the months since that historic bottom, the S&P 500 has rebounded more than 68 percent and set over forty “all time highs.” All this exuberance when the world’s economy is still reeling from the impacts of a global pandemic should serve as a warning in line with Buffet’s advice to be fearful when others are greedy.

 So what’s a wise investor to do? 

 Focus on your goals.  Keep your goals at the forefront of your investment decisions.  This will help you maintain sanity when the market swings wildly in one direction or the other.   

 Have a plan.  Develop an intentional, well-defined financial roadmap to achieve those goals.  Having a plan makes it easier to ignore all the hype and focus on what’s important to you. 

Own a diversified portfolio.  Invest in a diversified portfolio of low fee mutual funds and ETFs.  Through these funds, you’ll own stock in hundreds if not thousands of companies, which allows you to ignore the headlines. 

Set it on autopilot. Establish a monthly savings and investment plan that puts your decisions on autopilot.   Investing systematically over time eliminates the flawed temptation to try to “time the market.”

Partnering with a financial planner who can help you build your financial roadmap and navigate life’s inevitable ups and downs gives you the freedom to focus on more important things in your life, like your family and your passions.  

As always, individual investment decisions are unique to each individual and family situation. I enjoy working with military families with whom I share common values and can build trusted relationships. 

To learn more about working with Tailwind Financial Planning, please schedule a free introductory call.