FOMO Hits Investors In The Worst Place: Their Wallets
By: Stacy Francis
February 27th, 2020
The social disease FOMO has nothing to do with illness. It has everything to do with the “fear of missing out.” FOMO sufferers find themselves consumed with thoughts that others have more fulfilling and interesting lives, along with more success and wealth.
Once thought to be relegated to social media, FOMO is rabid in the financial world. Finance FOMO sufferers are making big mistakes that can cause them to vastly underperform in the stock market and lose significant amounts of their wealth chasing hopes of quick money.
Getting Caught Up In The Latest Initial Public Offering Hype
Companies that are set to go public and offer their shares to be purchased for the first time often spend hundreds of thousands of dollars paying for advertisements and media placements with the goal of creating a frenzied demand for the stock. It is nearly impossible to stay levelheaded when you are surrounded by media telling you to invest because you will make a fortune or kick yourself later.
The recent Peloton IPO sent investors clamoring to buy shares being offered at nosebleed high prices of more than 11 times its revenue. The financials didn’t make sense, but that didn’t dissuade investors who wanted to get a piece of this sexy stock. Rational analysis went out the window, and stockholders suffered. By the end of the first trading day, Peloton shares had plummeted 11% from its IPO price. Uber investors also felt the sting of a hot stock gone south. Trading at $47 as a high shortly after its IPO in mid-2019, Uber stock is still coming in under its initial value now.
Typically, IPOs are not good investments. In the months leading up to an IPO, the company tries to drum up interest so its stock price can be artificially high, making it hard to have long-term gains. Many experts believe a low-cost index mutual fund is a more solid investment than trying to make money in risky IPOs.
From 1996 to 2000, the NASDAQ stock index exploded from 1,058 to 4,131 points. Many of these technology stocks had little to no earnings, yet they still commanded steep prices, because investors feared that if they didn’t get in now, the price would be too high in the future, and they would miss out. Millionaires were minted overnight until it all went wrong. The dotcom bubble burst, and trillions of dollars of investor wealth vanished as the NASDAQ plunged to under 2,000 points by the end of 2001.
Few did their due diligence on these hot tech stocks to make sure they were the best long-term investment for their personal portfolio and goals. It took many years for the average investor to recover.
It’s generally agreed upon that a diversified portfolio made up of stocks and bonds from many different industries is the way to achieve long-term significant stock market returns. Focusing only on one sector does not work.
Diversifying Your Portfolio In The Wrong Way
Some investors fear they’ll miss out on returns if they only get advice and tips from one advisor or firm. These noncommittal investors compare performance but end up underperforming in the long term.
Working with multiple financial advisors can create inherent problems by increasing risk and forcing an advisor to make decisions for you within a vacuum — not knowing your entire financial picture. Understanding your whole financial picture means better tax, income, cash flow, estate and investment planning.
It is nearly impossible to accurately model what your return rate will be and whether the amount you are withdrawing from your portfolio is safe, without knowing, for example, what the other 75% of your money is doing with your other advisors. If your accounts are held at different institutions with different advisors, they cannot work in harmony. Advisor A has no idea how Advisor B might change the allocation and investment mix in the future, increasing the risk that you may not be able to reach your goals, like saving for retirement.
Both advisors could be purchasing the same investment, resulting in you having too much money in one asset class. I see this often in the area of technology. One advisor purchases Apple stock, and the other purchases a mutual fund that has a large holding of Apple. The duplication would not be easily detected by you and leads to portfolio overlap, causing unnecessary risk and an imbalance in your portfolio.
In addition, your time and money are compromised when working with multiple advisors. Time is one of our most precious assets, and you’ll need to spend a significant number of hours to manage all your advisors. It is likely you will also have to pay higher fees if you disburse your money among several firms.
How To Overcome FOMO
Investors should generally avoid stock picking until they have a diversified portfolio and a cushion to fall back on. It’s important to research hot stocks and not to just follow advice from a relative. Make sure you can handle the hit if the stock doesn’t meet market predictions.
If you are debating whether to work with one or multiple financial advisors, it is safe to say you need to overcome the FOMO effect. It can lead to unnecessary risk and a lack of understanding of your entire financial picture. It’s in your best interest to look for a single credentialed advisor, preferably one who does comprehensive wealth management and financial planning. When choosing an advisor to stick with, you want to find the best fit for your values.
FOMO may be a universal feeling, and we all must overcome our own specific financial situations caused by the effect. However, it is crucial to understand what is most important to you and your goals.