NEW YORK (MainStreet) Fear of missing out (FOMO) is a term typically associated with romantic relationships and social interactions, but FOMO also exists among investors who experience anxiety at the possibility that an exciting or interesting investment may be happening elsewhere.
"Fear can be a powerful motivator but it is a terrible economic indicator," said ReKeithen Miller, a certified financial planner with Palisades Hudson Financial Group in Atlanta.
FOMO is a syndrome often aroused by the news or social media posts when markets are high and strong.
"Uncertainty is one of the things markets hate the most," said Kyle Mowery, managing partner with GrizzlyRock Capital in Chicago. "The media, investors, and all those involved in markets become excited about earnings and a cycle of optimism starts to well up. For many investors, this can be an extremely challenging obstacle."
One certainty is that equities were up again until very recently.
The S&P 500 ended 2013 with a 29.6% gain, its best since 1997 but more recently the benchmark index tumbled 2.1% and closed at 1,790.29 after China's manufacturing slowdown left investors wary of equities and emerging market currencies.
"The S&P 500's performance in 2013 happened despite investors wringing their hands over Fed tapering and a government shutdown," Miller told MainStreet. "If you were listening to the news and trying to find the perfect time to invest in U.S. equities last year, you likely missed most of the run up because the news was mostly negative."
Investors further engage in FOMO because risk doesn't appear significant.
"Investors experiencing FOMO often chase hot stocks and continue to hold them when they correct and often experience great losses if and when these positions revert to the mean," Mowery told MainStreet. "Good performance can cause FOMO-type investors to jump in as the environment becomes more challenging."
Investors engage in FOMO in three significant ways. The first is over optimism bias, which involves seeing a silver lining in a grey cloud.
"There are no silver bullets when investing," said Mowery. "Investors and traders will have some winners and some losers, which is the nature of the game. By selecting a robust process with reason, investors put themselves on track to compound capital without being influenced by FOMO."
Recency bias is being overly focused on what's happening now rather than 20 years ago.
"If you look at historical returns of various investments, you will find the investment that performed the best in the previous year usually doesn't repeat the performance the next year," Miller said. "Having a diversified asset allocation is important, because it is nearly impossible to determine which asset class will outperform on a year-to-year basis."
Finally, confirmation bias occurs when investors and traders believe in the accuracy of their choices due to price movements in their favor in the financial markets.
"The key to overcoming this basic human bias is to seek out disconfirming evidence," Mowery said. "By reflecting on information which may challenge your thesis, the mind will refrain from lapsing into confirmation bias."
--Written by Juliette Fairley for MainStreet