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How to Avoid FOMO Trading

Republished with permission by SouthFloridaReporter.com on

By Brian O’Connell

The fear of missing out on a stock is all too real. FOMO or “fear of missing out” applies to the anxiety of potentially passing up a profitable investment, just as surely as it applies to missing out on a great concert or a college reunion.

For investors who visualize a scenario where a stock rises sharply in value but goes unpurchased, the fear of missing out might keep them up all night.

Yet investors miss out on profit-making opportunities all the time. Consider, for example, an investor who makes a rational decision to buy into a conservative bond fund at the expense of a potential high-flying technology stock, under advice from an experienced financial planner.

Their money is parked safely in the fixed-income fund—but in the meantime, the high-flying stock rises from $20-per-share to $40-per-share. In this scenario, the fear of missing out on the stock market opportunity has been realized, thus giving the “FOMO” syndrome some real-world credence—at least in the short term.

Recommended: Smart Investing Strategies for Beginners

What Is FOMO Trading?

FOMO trading happens when an investor lets their fear of missing out drive their investing decisions—to the exclusion of other insights and instincts. This can trigger errors, creating problems in an otherwise well-managed investment portfolio.

For example, an impatient trader may rush to buy a hot stock even if it doesn’t fit into their portfolio strategy, or if the stock risks could jeopardize the portfolio’s stability.

Yet buying any investment without proper research, risk assessment, or a planned exit strategy if the stock goes down, is the opposite of effective stock market investing.

Understanding Behavioral Finance

Sociologists use the term “behavioral finance” to describe the overall need to abandon rational thought and follow a herd to mitigate any FOMO anxieties. With behavioral finance, emotional and sociological influences replace scrutiny and logical thinking, which can significantly alter investment outcomes.

The fact that so many stock market rumors are stoked on social media, and that there are so many investors who rely on social media for investment ideas, only adds more pressure to cave to stock FOMO and buy an untested stock.

Ways to Avoid FOMO Trading

How can an investor fight off FOMO tendencies and remain a stable and steadfast investor? It’s not easy given the pressure to trade frequently these days, but these tips can get you on the rational path to investment management.

Invest With a Plan in Mind

Investors who trade according to a well-thought out plan or investing strategy—and not with a FOMO mindset—are likely to be more prepared for better investment outcomes. By doing research, learning how to value a stock, and establishing your own tolerance for risk, you’ll be less likely to fall for the latest “word of mouth” stock and stop FOMO in its tracks.

Stay Calm in Highly Volatile Markets

Many impulse trades come at a time when markets move fast. When investing in a volatile market, it’s especially important to trade with strategy in mind, rather than feelings.

Be Sensible About Trading

A single stock market trade rarely makes or breaks an investment portfolio. If you do hear about a can’t-miss stock and are anxious to pull the trigger and buy that stock, it can help to keep it in perspective: there’s always another market opportunity down the road.

Avoid Investing Money You Can’t Afford to Lose

The old adage of “never playing with money you can’t afford to lose” is very much in play with FOMO investing. It’s never wise to chase a stock with large amounts of money your portfolio can’t afford to be without. In nearly all cases, the risk may be too high and the impact too potentially severe.

Don’t Mistake Social Media for a Sound Investment Strategy

No doubt, social media sites capture a great deal of attention from market investors. But these platforms may be loaded with touts, short-sellers, penny stock promoters, and other investment shills who have their best interest in mind—not yours. As a rule, social media touts always talk up their gains but rarely mention their losses. Remember that maxim when you’re under the temptation of a FOMO trade.

The Takeaway

FOMO trading is a type of behavioral finance—in which an investor lets emotions like the fear of missing out replace logical, strategic thinking. FOMO trading often happens on a whim without much thought, which can significantly impact investment outcomes.

When it comes to investing, it helps to be prepared with research, knowledge, and an understanding of your own risk tolerances and financial goals. With a SoFi Invest® online brokerage account, members can choose to trade stocks, ETFs, and crypto, or let us build a portfolio for you with automated investing.

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

Republished with permission by SouthFloridaReporter.com on May 19, 2021

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