“Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.” – Benjamin Graham.
In recent years, the ‘Fear of Missing Out’ or FOMO as we know it, has changed the financial landscape in India for the worse. With the millennial investor sporadically jumping in and out of equities, the stock market has become a tough space to navigate. And the FOMO train doesn’t just stop at stocks. It breezily halts at asset classes such as gold and cryptocurrencies from time to time. Let’s take a closer look at how the FOMO phenomenon has infringed on our personal finances.
The FOMO Uncovered
In 2014, Tata Communications published a global survey that aimed at understanding people’s emotional dependency on the Internet. The study offered insights into people’s behavioural associations, technical understandings and emotional connections to the Internet. It was then that I chanced upon the infamous FOMO.
Not knowing what the term meant, I hit up the world’s most exploited search engine. No prizes for guessing. When the search results popped, I felt like kicking myself, realising how self-explanatory the term was, especially given the context of the survey. FOMO is the fear of missing out. I had an idea about young adults facing anxiety due to being over-exposed to the Internet from an early age. But I hadn’t realised the fear had taken over the entire connected world – adults and kids alike, till I understood its impact in numbers.
The survey was conducted with a pool of 9,400 people across six countries: France, Germany, India, Singapore, the U.S. and the U.K. In the findings, it was reflected that 64% of respondents admitted to their fear of missing out when not connected to the Internet, while 80% of Asian respondents confessed to displaying negative emotions.
Well, it’s pure psychology. If you feel excluded from something, it spikes your curiosity. Worse even, if you’re persistently exposed to information about others, it instils a sense of anxiety. And the emotion is noticed across age groups.
FOMO and the Frequency Illusion
A little bit about me. In 2018, I started working in the marketing division of a prominent broking house. As a marketing professional, my work involved piquing customer interest and creating brand awareness. During those days, in advertising, our general conversations revolved around influencer marketing, the rise of millennial and Gen Z consumers, the penetration of JIO in rural markets, Tik Tok becoming the new go-to social platform and the evolution of the brand-recall game.
I don’t know whether it was the Frequency Illusion at work or the fact that FOMO had actually become a buzzword but I kept getting volleyed by talks about FOMO soon after I learnt about it. So it was natural that when the question arose in one of our internal meetings about creating curiosity amongst retail equity investors, I instinctively asked, “Do we want to create FOMO in investors?” The unanimous response I received at the moment was an overwhelming ‘Yes!’ But going with pure instinct would be a folly. How could we use FOMO to our benefit?
We got down to our respective fishing expeditions, and all of us found that apparently, feeling excluded can drive millennials to start investing in stocks. The ingredients were already present. Our role was to just create the perfect recipe through our creative marketing tactics. Irrespective, we acknowledged that we were treading a tricky path. As the millennial investor rose in the last decade, we realised that FOMO has impacted their finances in more negative ways than one.
FOMO in personal finance
With FOMO infringing every aspect of our lives, it’s not surprising that even our finances have incurred its wrath. In personal finance, FOMO is the all-consuming feeling that you’re missing out on both, favourable investing and spending opportunities.
In investments, FOMO occurs in two circumstances-
- At the time of an actual market rally
- When there’s a market buzz created (e.g. when an investment strategy is painted across news channels or when social investors hype up certain meme stocks)
In both situations, inexperienced and sometimes even seasoned investors are left with the fear of missing out. “Everyone’s investing. Why not me?” FOMO makes traders feel anxious because of the perception that others are making money on an investment’s price movement while they’re not.
However, the desire to be part of the bandwagon and make money off any viral trading strategy could make you enter a position before properly analysing it to determine if it is a good investment. A recent example of this would be the retail investor’s surprising response to the stock market during the first wave of the coronavirus crisis.
What the investors do not realise is that trading when spurred by feelings of FOMO often doesn’t result in a positive return on investment. Something which is performing well doesn’t mean that it will continue to do so in the future. The fact is that many investors end up losing their money by investing in price movements or market trends right before they’ve run their course.
Fear of missing out in trading often works contrary to the common investment edict to buy low and sell high. Alternatively, it encourages investors to buy when a stock is already high. Since it generates psychological and emotional responses, things like fear and impatience win out over your disciplined rational mind.
Not all impulsive actions result in the desired direction. FOMO trades are no different and can prove to be riskier, not just because investors are buying at a potentially inflated price point, but also because they’re often executed on highly hyped investments like meme stocks or cryptocurrencies.
If you look at the fomograph above, it explains in a quick view, the wave of emotions an investor goes through. The point of maximum financial risk is when the market is hot and the prices are already inflated. Whereas, the point of maximum depression creates the experience of failing to make the most of the opportunity. If you let emotions get the better of you and keep feeling that you’re stuck with the wrong stock without actually analysing its value, you may just miss the chance to engage in the old, reliable rupee-cost-averaging and end up making losses on a fad. Reason – lack of knowledge and research and the unmissable FOMO!
The fomograph is not only linked to your investments but also your spending and borrowing decisions. Giving in to the temptation coupled with the anxiety to create a lavish life results in unwanted expenses and impulse buys. This is also repeatedly cited as one of the reasons people indulge in unnecessary borrowing.
In the digital age, borrowing from any financial institution is easy. Many organisations offer short-term loans within a minute of applying. While such loans are very easily available, what hurts is the skyrocketing interest rate, mainly due to their unsecured nature. Moreover, these loans are bundled with products and offerings you don’t require. Thus, high EMIs can not only put you in a financially tight spot but also lead you towards a debt trap.
Is equanimity the only way out?
Getting anxious about exclusion is a natural human emotion that financial institutions have now started exploiting by tapping into our desire to continuously stay on top of how others are saving and spending. As brands, all they have to do is instil a sense of excitement in you by fabricating a sense of excitement amongst people around you. This is easily achieved through social proofing, influencer marketing, highlighting missed opportunities and many such marketing techniques. To top it all, they promise instant gratification in the form of discounts and rewards apart from the temporary emotional high that ceding to FOMO anyway gives you. This has modified investing behaviour and impacts the overall personal finances of an individual.
Avoiding the temptation to follow the crowd is much easier said than done. However, these simple steps can help you in your endeavour to discipline your finances:
- Getting invested for the long-term. I know, I know! You have heard this many times before and there is a reason for that. When you stay for the long haul, the fear of giving into short-term trends cedes to exist. You study the course of your investments and are ready for up and down.
- Equity is just part of it, do not bank your savings on it. This is exceptionally hard for new-age investors because a major percentage of their investment is allocated to direct equity or equity-linked investments. However, equity by design is in sync with the market and if the market goes down so do these investments. It’s the harsh reality. At the same time, if you rationally allocate your investments in a healthy pool of diverse asset classes and then look at your overall portfolio, there’s more balance and less room for impulsive investing.
- Set goals so you stay on track. Having a financial plan without a goal creates a lack of directional motivation. It is important to envision a milestone linked to success. With FOMO This helps you with the much-required mindfulness in the times of FOMO.
With FOMO becoming an inevitable part of our lives, it is important to identify key triggers and events that nudge us to instinctively act on our finances. What’s more important is to take an approach that works for you. There is no one-size-fits-all solution here. Your financial wellness is a function of your financial personality and the emotions that make you, you. That being said, focusing on your overall financial wellness, and big-picture thinking along with some quality research before making any decision is sure to deter you from acting on emotionally-charged decisions.