“FOMO” is an acronym that stands for “Fear Of Missing Out”, which refers to the all-consuming anxiety we feel when we perceive others to be doing something we should be doing. It’s the nagging feeling that takes over when you are in traffic when you just want to get to your destination, but it seems all the other lanes are moving faster than yours. While it applies to all types of situations in our lives, it has been particularly prevalent in the world of investing.
The ARK Innovation fund (ticker: ARKK) is a prime example of FOMO in the investment world. ARKK was up 152% in 2020, and it deserves accolades for that type of performance. On the way up, the media hyped the fund for their performance. The portfolio manager, Cathie Wood, was simply everywhere, and social media amplified this effect even further. That’s when FOMO can kick in. You start thinking to yourself, “Why don’t I own ARKK? I want to be up 152%, too!” You click the buy button on ARKK and wait for the gains to roll in.
You aren’t alone, as scores of other investors also jump into the fund. The higher the price went, the more assets that flooded in. The chart below shows the price of the fund with the volume of the fund on the bottom. The thought of buying low and selling high was replaced with buying high and selling higher. As long as the price was going up, the crowd wasn’t selling. Put another way, the crowd was not made up of ARKK truthers who will hold the fund no matter what, but rather of short-term traders and investors who have been stricken with FOMO. In other words, the balloon is ready to pop.
What happened next was only a matter of time. The price fell swiftly: down five percent the first month, then down eight percent the following month. Cut to four months later and you are down 18% during a time when the general stock market is up. The same forces that moved the price up are now applying similar pressure in the opposite direction, driving the price down. FOMO has now been replaced with another four-letter word: FEAR. As you read this article, ARKK is down 40% from the high, while the broader market is up 20%.
People with FOMO repeat this cycle over and over again because they are always looking for the next ARKK, which is a deeply flawed approach to investing. Everyone wants to get rich quickly, but imagine repeating this behavior year after year – you will wake up years later with little to any gain.
If FOMO is caused in part due to overconfidence, then the antidote to FOMO is humility. You should be honest with yourself that you don’t know what is going to happen next, and the logical step you should take before investing is to perform a pre-mortem. A pre-mortem is the process of imagining the investment performing poorly and considering what had to happen for that predicted outcome to become reality. Considering what could go wrong and creating a plan for what you will do about it before you invest is a prudent move.
Another antidote to FOMO is realizing you have enough wealth now that you don’t need to risk it in search of the next investment that takes off like a rocket. Risking what you have now for what you don’t need is silly – do you remember when all you wanted was what you have now?
The biggest enemy can be the person in the mirror. One of the underrated roles we play as financial advisors is to stand between you and a mistake. The simple truth is saving money and investing it over time is the path to creating wealth. Put your emotions aside and let your wealth compound over time without interruption.