The fear of missing out can be a killer for investors. How top advisors keep it at bay

Fear of missing out, or FOMO, can be a powerful psychological force — and it can lead unwary investors to lose wads of money, financial advisers say.

A group of British psychologists defined FOMO as a fear “that others may have enriching experiences from which one is absent”. Financial adviser Josh Brown uses the term “animal spirits” to describe the concept of investors letting their emotions guide them.

These days, social media platforms are a big source of FOMO, bombarding users with messages about “hot” investments such as cryptocurrency, meme stocks and special purpose acquisition companies, or SPAC. Influencers and experts touting these assets say buyers can make big bucks, but they may overlook the risks or fail to disclose their own motives.

This is not to say that trendy investments always turn out to be failures for buyers, depending on when they buy and sell. The problem is that investors often only hear about the big winners, not the misses, advisers and pundits said.

Controlling FOMO “is probably the most important financial skill these days, in the age of social media,” Morgan Housel, author of “The Psychology of Money,” said in September at the Future Proof Wealth Conference at Huntington Beach, California.

It’s generally safer to “get rich slow” because investments that offer huge growth potential also tend to carry more risk and therefore greater chance of loss, said Joseph Bert, a certified financial planner who is President and Chief Executive Officer of Certified Financial Group.

“People try to hit the home run, which is like [winning] the lottery in investing,” said Bert, whose company, based in Altamonte Springs, Fla., ranked No. 95 on the 2022 CNBC Financial Advisor 100 list.

It was relatively easy for investors to make money in 2021, a year when most asset classes seemed to be going nowhere but up. Solid gains in stocks and crypto have created a million new millionaires.

Various social media communities and fashionable men and women helped investors buy last year.

For example, bitcoin prices could soar 20% or more in a day following a single tweet from Tesla and SpaceX founder Elon Musk; a february 2021 Tweeter imbued dogecoin, another cryptocurrency, with a kind of common man quality, calling it “the people’s crypto”.

The WallStreetBets community on Reddit has also fueled a frenzy in meme stores such as GameStop and AMC. Rapper and music producer Jay-Z, NBA player Steph Curry, tennis phenom Serena Williams and other celebrities have also endorsed some SPACs – investments that are near initial public offerings – and were, until one of Wall Street’s hottest trends recently.

Depending on when investors bought and sold, FOMO may have cost them a lot of money.

The price of bitcoin, for example, hit nearly $69,000 in November 2021, more than tripling in a year. Since then, it has reached around $19,000, around the same level as prices before its surge. The extreme volatility of GameStop shares has seen share prices drop at times by 40% in the space of half an hour.

Last year, the Securities and Exchange Commission issued an investor alert regarding celebrity-backed SPACs.

“Celebrities, like anyone else, may be involved in a risky investment or may be better able to bear the risk of loss,” the SEC said. “It’s never a good idea to invest in a SPAC just because someone famous endorses it or invests in it or says it’s a good investment.”

A CNBC index that tracks SPAC transactions is down more than 60% in the past year.

“I think very few people understand their risk tolerance and their sense of future regret until things go wrong,” said Housel, who added that everyone has a high risk tolerance in a market. bullish.

Playing on this future regret is how top financial advisors try to dissuade investors from succumbing to FOMO.

If a client wants to move a lot of money into a “FOMO asset,” said Aldo Vultaggio, chief investment officer at Capstone Financial Advisors, he likes to discuss with them their likelihood of success in achieving certain financial goals with and without these assets. The company, based in Downers Grove, Ill., ranked 77th on CNBC’s list of 100 Financial Advisors.

In other words, if a client is already on the verge of having enough money to retire comfortably or to pay for a child’s college education, why take more risks?

Fear of future failure helps deter clients from making the short-term investment – ​​or at least reduce their overall allocation to it.

“Why invest in these speculative assets? They usually want to do it because they could potentially earn a higher return,” Vultaggio said. “But if you don’t need to do this, why would you?”

“The ship is on track to be successful here,” he added. “We want to avoid something that could throw you off course.”

Vultaggio tells clients who are keen on holding a FOMO-like allocation to a risky asset that they should generally limit their position to a single-digit percentage of their overall holdings and shouldn’t invest with the money they have. need in the short or medium term, he said.

Investing in stocks, bonds and other asset classes always involves some risk — but it’s a calculated risk that typically has a track record of success over long periods of time, said Madeline Maloon, financial adviser at California Financial. Advisors, a San Ramon, Calif.-based company that ranked #27 on the CNBC Financial Advisor 100 list.

“We need something that we have a game plan for, while these hot stocks, crypto, whatever, [clients] have to know it’s their play money,” Maloon said. “It’s not what we want to rely on for our retirement.”