(3 minute read – Investing FOMO)
Hi there accounting fans! It’s World Investor Week from 4 October 2021 to 10 October 2021! We’re helping the Financial Markets Authority to promote this year’s Investing theme:
Investing FOMO? Take a Mo…
The past few years have seen a huge surge in DIY investors. Platforms like Robin Hood, Sharesies and Market Watch make it super easy for the average non-financey person to invest!
But there’s so many things to invest in! Where do we start?
Looking to start your investment journey? Read here about seting your financial goals first!
I’ll tell you one place to NOT start – and that’s by taking advice from your mate’s mate’s second cousin’s nan who once dated a stockbroker back in the 1990s.
Seriously though. There’s a lot of information out there about investing and you can’t scroll two posts on social media without reading about some former-shmuck-turned-millionaire making money on meme stocks or crypto. It also doesn’t help that ‘the media’ LOVES to write about young-ish types that have somehow scrounged together their first home deposit ‘cos of smart investing and hardwork (and a lil’ help from rich ol’ mum and dad).
We’re constantly bombarded by media telling us that we (that’s us regular shmoes) need to be INVESTING so that we can make MONEY and secure our FINANCIAL FUTURE. This creates a feeling that we’re missing out on something if we don’t investing, hence FOMO (Fear Of Missing Out).
Why Investing FOMO is bad for you.
FOMO makes you feel like you’re missing out. In investment terms, it makes you feel like you are missing out on ‘sweet gains’ if you don’t invest right now. This can create situations where individuals with little to no investing experience make poor, uneducated investment decisions.
For Example:
Junior is a Uni student who’s saved up $5,000 working part time serving tables in restaurants. Junior has lots of friends who keep telling him how crypto is the next big thing. Everyday they tell him about the tens of thousands of dollars their investments have grown overnight. Junior, not wanting to miss out on the crypto rush, invests all his savings into some crypto assets. He smiles as his assets grow, but as they start to drop in price, he starts losing his investment and panics. His friends all around him tell him to sell, sell sell. Junior, once again is acting on fear, but instead of the fear of missing out, it is the fear of losing more that drives his decision. So he sells it all off at $2,500, effectively losing half of his investment. But he tells himself its ok, because at least he didn’t lose more.
From Junior’s example, we can see how peer pressure caused him to make some bad investment decisions. It’s also painfully obvious that he went in not even knowing what he’s signed up for. He didn’t understand the relationship between risk and return. He didn’t even stop to consider whether he should be holding his Crypto assets on cold wallets or hot wallets.
FOMO should never be the basis of an investment decision. In fact, fear should NEVER be a decision making factor in any type of investment.
How to avoid Investing FOMO
Investing FOMO is bad. We’ve established that. Here’s how we can avoid it:
Understand the relationship between risk and return
I’ve written about risk and return in this article previously.
So, I’ll just quickly summarise what I’ve written about it before.
All investments can be categorised based on their level of risk. Low risk investments provide you with low but secure returns. High risk investments provide you with high but unsecure returns.
Putting your money in a bank account is a low risk investment. You are VERY unlikely to lose your investment by putting money in a bank account. But you won’t get as much return.
Putting your money in stocks or crypto is a high risk investment. You are VERY likely to lose your investment as the prices of these investments go up and down and up and down. But if they do go up, you stand to gain a lot more than you would in a low risk investment.
Figure out your personal risk appetite
Different people have different risk appetites.
Some people eat Risk for breakfast. Some people avoid Risk like its anchovy-flavored ice cream.
When listening to your peers or reading about people making cool investments, it is important to remember that these people ARE NOT YOU. They are making investments based on their risk appetite. You need to figure out what your personal risk appetite is.
Often the best place to start is to ask yourself the following question:
“How much can I afford to lose without impacting my lifestyle and financial goals?” Once you’ve answered that, you’ve got a good idea of your risk appetite.
Your personal risk appetite should not be influenced by what your friends are doing. It most certainly shouldn’t be affected by clickbait articles on investment. Remember that if you are ever in doubt, you can always check with a finance professional to work out your personal risk appetite.
Find a financial goal and stick to it
It is important to remember that making more money isn’t the end goal of investing.
In fact, check out this article about why money is just a means to an end.
Investing is there to help us meet our financial goals. Financial goals can include things like:
- Buying a house
- Retiring comfortably
- Starting a business
- Saving up for college/university
- Etc.
Investing is simply the act of making sure that our savings are growing while we work towards our financial goals. So long as we have enough money to meet those financial goals, we can say that we have invested our money successfully.
This means that you shouldn’t be swayed by promises of ‘higher returns’ or ‘greater wealth’ when making investment decisions. Remember – there are a lot of bad players out there who want nothing more than to take your hard earned savings off of you. Be sure to invest in investments that make sense for you and your long-term financial goals. Don’t invest for the sole purpose of making more money.
Say no to Investing FOMO
Be a smart investor. Make sure that you fully understand what you are investing in. Understand the risks and the potential returns you can get out of it. More importantly, make sure that whatever you are investing in helps you meet your financial goals.
Fear can be a great motivator, but it also negatively affects our decision making. It is important to make investing decisions with a clear head and positive outlook.
So stop listening to your mate’s mate’s second cousin’s nan who may or may not have dated a stockbroker in the 1990s.
Start charting your own investment journey!
Read more about low risk investments here!
Hungry for risk? Read more about high risk investments here!