FOMO. Fear of missing out.
It’s the acronym for a behavioral phenomenon where people worry they’re missing out on something important they believe may help improve their lives — information, the novel features offered by the latest smartphone or the desire to be part of an exciting shared experience like a pop star’s three-hour concert.
We’ve also heard much about FOMO in the investment world over the past few years. Many will recall the so-called meme stocks or cryptocurrencies, but we can likely find FOMO impacting investors beyond these cases.
Consider the recent interest in companies with seemingly any recognizable tie to artificial intelligence (AI). Surely, some investors have heard from friends and family or read about the perceived promise of AI and thought, “I better take advantage of that.” Loading up on companies they believe capture this opportunity might be their next step.
But problems can arise when making investment decisions based on emotions instead of sound investment principles. Common pitfalls in this type of decision-making include:
Not being mindful of valuations (i.e., buying into high-flying stocks often means paying a high price versus fundamentals).
Not understanding the risks (e.g., cryptocurrencies’ high volatility, an individual company’s unique risks—risk that is mitigated through a broadly diversified portfolio).
Not considering how the desired investments fit into a long-term financial plan.
The outcome of chasing a trendy investment can easily stray from the benefits we had in mind.
Putting FOMO to Good Use
But investors might benefit from FOMO in at least one instance.
In our view, broad U.S. stock market returns this year exemplify why investors should fear missing out on the opportunity that comes from sticking with a broadly diversified portfolio over the long term.