FOMO or FOLO: The Two Investment Catalysts
We have all likely heard of the acronym FOMO or fear of missing out. Now I’d be shocked if anyone has ever heard of FOLO, especially since I invented it 1 minute ago (patent pending 😊). FOLO, as all the kids are calling it, stands for fear of losing out. Now, how do these relate to investing? Well, how about if I said they have everything to do with investing. In fact, FOMO and FOLO are essentially the two guiding principles for most people when it comes to investing.
What is FOMO in stocks?
Let’s take a minute and start with FOMO. In my approximately 20 years in this industry, I’ve come across a lot of FOMO investors. These are those investors that are investing solely based on what we call herd mentality bias. In other words, they are investing based on emotion or basically fear of missing out. This has been an investing trap/principal of our country from basically the beginning.
In 1848 James W. Marshall found gold in a sawmill in Sutter’s Mill in Coloma, California. News quickly spread across the world and quickly brought 300,000 people to the Golden State. Many of whom were left with no pools of gold to swim in like Scrooge McDuck. We as flawed wired humans have learned very little from these days. FOMO is still the cause of most bubbles we come across this very day. The Tech bubble, real estate bubble, crypto bubble all have the same FOMO characteristics at the core.
My point for saying all this is the fear of missing out mentality leads to herd mentality. This bias essentially drives half of our investing behavior. It is a strong and powerful psychedelic that has an extremely strong influence on many of us. We all fall into the trap at some point as the thought of a pot of gold at the end of the rainbow is very appealing.
The other major influencer in our investment behaviors is my newly coined term, FOLO. You see if FOMO speaks to our greed, then FOLO speaks to our fears. Investors are often driven by this very principle. They are terrified of losing money and thus invest (or don’t) accordingly.
There is a behavioral bias called loss aversion that speaks to this very point. Essentially, as much as we are wired to follow the masses the other half of us didn’t make that few thousand-mile trip out west on the hope of gold. Why? Because they were too fearful. Loss aversion suggests that we as humans feel pain twice as badly as we experience joy.
I saw this as recently as last year as individuals panicked with the Covid uncertainties. Prior to that, I would have new clients monthly come in that were heavily invested in cash due to their bad experience from a decade earlier. You see the psychological scars imprinted on us after a big loss, or even at the prospect of one, can have a tremendous effect on our investing behaviors.
If FOMO is the devil on one shoulder some view FOLO as the angel on the other shoulder. But in my humble opinion, the best investment strategy lies in-between
What lies in-between?
Your Brain dummy… Duh! You see, in-between those shoulders is a very complex thing in the human brain. Yes, what led us here in the first place was our fight or flight innate survival instinct, buried in our amygdala. A sound long-term investment philosophy CAN NOT be driven by these two factors. One has the threat of us making a catastrophic mistake and the other can leave us going nowhere.
So how can we rewire these brains that have been hardwired for thousands of years?
Facts & Faith (with a little bit of outside help)
Facts are a powerful combatant against FOMO & FOLO. For instance, during the dot-com bubble, all you had to do was look at the earnings of these companies trading at insane multiples. Conversely, those that sold everything after a big loss would have greatly benefited by studying long-term investing trends to realize this is all part of the ride. I can go on and on about how facts, not emotions, can lead to a sound investment philosophy.
Faith seems like an odd counterbalance to facts, yet it is an important one. Sometimes in life, and investing, it is very hard to see the forest through the trees. Last year for instance, with Covid ravaging our world and a dark cloud of uncertainty passing through times were hard. It was difficult to “see our way out” of this thing.
That said when times are tough having faith can be a powerful calming agent. Will Covid, Tech bubble, Real Estate Crash, etc be the end of our economy as we know it? Welp, as we’ve seen the answer is a resounding nope. That said these weren’t easy times to navigate through. Those that were most successful had a foundation of faith at their core even when facts were hard to discern.
Financial Guidance rounds out my F-themed blog here. Now that we understand my two driving factors of FOMO and FOLO, along with a couple of ways to combat them, it is time to shift focus to outside help. For many, thankfully for us, the best way to fight these powerful biases is to bring in the calvary. This is where we as financial planners can bring perspective, calm, and plenty of cold hard facts to the table. We have a vantage point and resources you don’t and are able to take the emotion out of a very emotional thing.
Many studies have attributed the additional value a financial planner (yes even Vanguard) can add to the investment component of one’s financial plan to around 3-5%. Many of the ways to do so are very technical in nature, although some of the biggest influencers to these statistics lie in our ability to coach on the behavioral side of things.
Hopefully, you can remember these words when inclined to make your next big investment shift. All I ask is you reread this article first and make sure you are doing so under the right influence.
As always stay wealthy, healthy, and happy!
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