Nov 04, 2020
FOMO and FOBI – two emotions based on fear and regret that every investor will experience at some point. But during 2020 and the global pandemic, FOMO and FOBI have had a bigger influence than usual. Here's why.
What is FOMO and FOBI?
Investors have been on a rollercoaster of FOMO and FOBI emotions during the coronavirus, which has created extremely volatile conditions in the markets.
FOMO, or ‘Fear Of Missing Out’, is when you regret not investing in areas that are now performing extremely well. In 2020, the huge market rally in technology giants and a booming medical industry has investors wishing they were a part of this action, and tempted to purchase relevant stocks.
On the other end of the spectrum, FOBI, or ‘Fear Of Being Invested’, is where investors panic over the high risk of their assets, which were especially prevalent in March 2020 when the stock markets crashed.
Widespread media commentary and social media only amplify these feelings, as constant reminders on the latest market trends and best / worst performers are pushed into people's faces. Uncertainty and financial difficulties can also influence investors to quickly attempt to jump on, off or over board.
However, despite feelings of FOMO and FOBI both don't need to be acted upon – these are often drivers of poor decisions and losses, as investors stray from their long-term strategy.
How to deal with fear and minimise your regret
If you’re suffering from FOMO or FOBI, don’t worry, because there are many strategies to minimise the risks and control your emotions.
A tried and tested way to deal with the fear of missing out is a simple one - diversify.
In a perfect world, we would all have flawless foresight. But it’s impossible to consistently select the sectors and investments than perform well just about 100 percent of the time. So, diversifying your portfolio and investment strategies means you constantly achieve the perfect risk-return balance. Sure, you may not ride the high of a booming stock over a short period of time, but you also won’t suffer major losses when the market takes a hit.
With the markets regularly fluctuating through uncertain times, diversity covers all your bases and ensures you have security in just about any situation.
Setting yourself rules around investment decisions can help reduce the risk of acting on emotion. Especially when you’re under time pressure, these rules can provide a reliable guide on what your next move should be during a major change, such as a market decline.
Understand what’s at stake
Do the research and ground work. Understand the type of decision you are making from all angles. Look at what the benefits are if your decision proves successful, as well as the risks and losses you face if the situation doesn’t go your way. How many benefits are there compared to the risks? You may find that the rewards simply aren’t worth the multiple potential downfalls involved, or, the return may be massive and you can manage the losses should they come.
Before acting, you should also detail every possible outcome and prepare yourself for what might lie ahead. This way, nothing should come as a major surprise to you and you’re ready to act.
Focus on today, not tomorrow
Don’t make your next financial move based on the ‘what ifs’ of the future. Instead, use and rely on the information available today.
This information doesn’t just have to be from third party sources. By keeping records of all your financial decisions, you can learn from your previous successes and mistakes, and reference back to your experiences when you’re unsure.
Don’t play Whack-a-Mole
Investors can fall victim to the ‘recency effect’, where a decision is influenced by the last event in the market, rather than being guided by long-term trends and your investment strategy. However, while a strong performing sector may be tempting, you can go into constant chase mode or become deep in a game of ‘whack-a-mole’ with the markets.
Basing your decision on what’s already happened will likely see you join the party way too late - when the stock has already peaked and your purchase ends up costly (in this case, it's better not to attend the party at all). So, avoid this trap by sticking to your long-term strategy and reinforcing your goals, risk tolerance and asset allocation.
Don’t let FOMO and FOBI dictate your investing behaviour. Before you make any major decisions, speak to an expert accountant who can provide you with advice and guidance on the best investment choice for your needs.
Talk to the team at Calder Wealth Management. Call us on (08) 8373 3333 to schedule your free initial appointment.
Written by Ben Calder at Calder Wealth Management.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.
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