At a dinner party, a friend mentions that he has been given an opportunity to invest into a private equity investment. He explains that, because of the particular circumstances and the plans for it, it’s going to produce a fantastic return. The friend is very excited and says that he is lucky to have been given the opportunity. “I’ve known the guy putting it together for a long time — he’s very wealthy.”
“It’s unbeatable. I’m so excited,” he says.
As the listener in these situations, it’s easy to feel some envy. These wonderful opportunities aren’t easy to come by and who doesn’t want to get a great return? It’s called FOMO, as the millennials would say: Fear Of Missing Out.
But FOMO is often the cause of losses. It leads to many other behavioural errors and is difficult to resist. FOMO is basically the anxiety or concern that others might be having experiences or opportunities that you’re not having. Those suffering FOMO feel deficient and their feeling of inadequacy results in them often putting aside the behaviour they know is right for the short term, resulting in them making unplanned decisions and behaving in a reactive manner. For those millennials susceptible to FOMO, social media is the worst possible tool. It provides a constant barrage of people apparently having tremendous experiences and wonderful lives. The last thing anyone who is unsure of themselves needs is lots of people telling them they’re on the wrong track.
The impact of FOMO
Studies show that FOMO leads to extreme levels of impatience and dissatisfaction. In the same way, investment FOMO affects many people in older generations including some who are very successful. They make rapid, unresearched decisions with large amounts of money. It increases the risks of error and often results in major losses.
Longer-term impacts on millennials can be very serious —mood swings, loneliness, feelings of inferiority, reduced self-esteem, extreme social anxiety, increased levels of negativity and depression.
Fortunately, for the older investors, it’s only money.
How to avoid letting FOMO influence investment decisions
As serious and prevalent as it is, both forms are relatively easy to avoid and get easier with practice.
My five best techniques are:
1. Slow down: Have a rule that decisions are never made under pressure, even if that pressure is self-imposed. Create an automatic circuit breaker to take a breath.
2. Be aware of what caused your FOMO: There must be something that’s causing the dissatisfaction. Find it. For millennials it could be boredom; for investors it could be not feeling comfortable with existing investments or not having a proper strategy.
3. Reconfirm your plans to achieve your objectives, and if there isn’t one, get one.
4. Understand the probabilities: Out of a thousand decisions made like this, what proportion end well? Accept that there will always be opportunities.
5. Have a sounding board: Explain the opportunity to someone else and force yourself to explain why you think it’s a good idea.
Unfortunately, many people only become immune to FOMO when they’ve experienced enough pain. For millennials, it’s the pain on the day after, and for investors the pain of losing enough money after making rapid decisions based on some great idea. It doesn’t have to be this way, but human nature suggests that for most, it will be.