If you’re like me, stories of people turning small amounts into millions during the recent GameStop investment surge may have left you with a feeling of envy. If you could have only gotten in on the ground floor. Or perhaps you wondered if it wasn’t too late to jump on. Maybe you even bought in when GameStop shares were at $100, only to watch a subsequent spike and rapid drop over the following days.
In all of those cases, there’s one common element: a sense that something big was going on, that you weren’t a part of it, and that you somehow missed out on it. There’s a desire to jump in, to be a part of it, even if you know in the back of your head that it might not be a great idea.
It’s the fear of missing out. It’s real, and it’s about more than just investments.
What is FOMO (fear of missing out)?
The fear of missing out is something we’ve all felt at some time or another. You hear that something interesting is going on, something that seems potentially exciting and profitable. You might not know all the fine details, but it seems exciting and, even worse, the window of opportunity to jump on board might be closing.
That’s the fear of missing out. Without that sense of fear that our opportunity might go away, we’d probably skip the opportunity, or at least delay our decision for a while.
What’s the financial danger of FOMO?
The financial danger of FOMO is that you’ll end up spending money on something without giving it proper consideration. Because you’re afraid of missing out, you overlook some other red flags about the opportunity and get on board anyway.
Sometimes, this can work out well, but because you overlooked some red flags, there’s a higher than normal chance that this expense ends up being one you regret in the long run. It is those regretted expenses, the ones that were clearly poor uses of money, that end up creating financial danger, because there are so many better uses for your dollars than an expense you regret. For example, one virtually never regrets eliminating debt or building an emergency fund or saving for retirement or saving for a house down payment.
How FOMO shows up in investing
The fear of missing out shows up in investing when there’s a particular investment that’s either currently doing exceptionally well or someone has convinced you is about to do exceptionally well. This means that there’s a group of investors that is either making a lot of money or is going to make a lot of money, and you want in.
The problem is that, quite often, by the time you hear about a great investment opportunity, the chance to make a profit has already sailed, and in fact, you’d simply be buying high rather than buying low and selling high.
FOMO, GameStop, and Dogecoin
The latest examples of FOMO in the investing world are the recent success of small investors buying into shares of GameStop and the recent leaps in value in some cryptocurrencies, most notably Dogecoin, a cryptocurrency like Bitcoin that experienced a similar surge recently. In both of those cases, a handful of early investors made a lot, and some later investors did quite well, too.
It can be really tempting to jump in once you start hearing about success stories like this, but more often than not, as soon as a story like this becomes big, the window of opportunity to make a big return is closing or has already closed. GameStop became a big story when it reached $200 a share, and after a few days of intense volatility, it rapidly fell below $100 a share. Dogecoin jumped rapidly from less than $0.01 per coin to more than $0.08 per coin in less than a week, but as soon as it became well known, it dropped back down to the $0.05 level.
These investments would have been stellar opportunities at the start, but by the time they became big news stories, they were at or near their peak, and the people who bought in then were left holding an overpriced investment.
How to avoid FOMO in investing
What can you do to avoid the fear of missing out when it comes to investing? Here are four key strategies.
Don’t bother with speculation once it’s big news
By the time you hear about a hot new investment in the news, it’s likely because the investment has already increased many times in value and it’s that increase that’s warranting the news reports. This was clearly the case with GameStop and Dogecoin recently. With Gamestop, there’s not much to say about an electronic gaming retailer with a stock price around $5, but when it suddenly jumps to $100 a share, then there’s something to talk about.
The catch, of course, is that by the time it’s interesting enough to report on, the window to “buy low” in the traditional “buy low, sell high” maxim has already passed. It’s already “high” now, and the best you can hope for is “buy high, sell higher.” That’s rarely a good idea. Most likely, you’re going to be the buyer when someone else who bought low is selling high. That’s not where you want to be.
Don’t invest in what’s hot in the news. In fact, you should entirely avoid investing based on news and pop culture. Most mainstream media reporting on investing is just noise in terms of what an individual investor should do, so treat it accordingly.
Don’t invest on a friend’s word without additional evidence you understand
What if a friend comes to you with a hot investment tip? While that might be a starting place for your own investigation into an investing strategy, it’s not nearly enough on its own for you to put your money into.
For starters, where did your friend get that information? Is your friend’s source trustworthy, and can you verify the trustworthiness of that source beyond your friend vouching for them? There are many shady investment deals that are spread via word of mouth, such as the pump and dump stock scam. Your friend might be entirely well-meaning while still being a victim of such a scam.
Simply put, do not put your hard-earned money into any investment recommended by a friend unless you can do completely independent research on the topic and fully understand what you are investing in. If you’re not sure how to invest, there’s no better time than the present to learn more about investing.
Use index funds and a ‘buy and hold’ approach
So, if those are things to avoid, what should you do instead?
The best investing approach for most individual investors who don’t have abundant time or knowledge to deeply investigate investment opportunities is to buy index funds and hold them until you need to sell them. An index fund is a very simple way to widely diversify your investments, allowing you to buy, say, a small portion of all publicly traded stock with a single purchase. This allows you to match the stock market with very little cost. While you’ll still see your investment rise and fall, you won’t experience your investment losing most of its value over the long term.
Invest in riskier things only with funds you can afford to lose
If you really are tempted to buy into the next GameStop, do so with money that you can completely afford to lose — your hobby and entertainment money. Don’t use money that you would otherwise use for repaying debts or saving for retirement or saving for your child’s college education. That money should be invested in more stable and reliable investments.
If you want to speculate, treat it as pure entertainment, and lose only money that you can afford to lose as entertainment without disrupting retirement plans.
Too long, didn’t read?
Whenever there’s a big boom in a particular investment, whether it’s GameStop or Dogecoin or something else, there may be a strong sense that you’re missing out on that investment opportunity. The same is true when someone tells you of a hot investment tip. If you’re feeling that fear of missing out, be careful. Make sure you really know what you’re investing in. Furthermore, don’t use money that you’re relying on in the future. If you must speculate, do it with entertainment and hobby money, not money you’re depending on for the future.
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Source: thesimpledollar.com