“Focussing is about saying no.” (Steve Jobs)
What is the point of investing?
In simple terms, there are only two reasons to invest:
- To save for a specific goal like sending a child to university or taking a holiday. These are finite targets with clear time frames.
- To achieve financial independence. This means building a pool of wealth that can generate a passive income stream so that you no longer need to work to sustain your lifestyle.
Investors who understand these goals also understand why fear of missing out (FOMO) gets in the way of a good investment strategy. In both cases, what matters is achieving consistent growth over time, not quick wins.
The problem with FOMO is that it encourages exactly the opposite – chasing trends and new ideas in the hope of a short-term windfall.
Where FOMO comes from
FOMO is rooted in the human impulse to compare ourselves to others. When we see friends or family making quick profits, we want a slice of the action. This can lead to impulsive decisions such as:
- Chasing hot stocks or trends. The trouble with this is that investors can easily buy into assets that have already experienced significant gains. Often this leads to buying at inflated prices.
- Abandoning long-term strategies. When investors see short-term opportunities, they may abandon their well-thought-out plans in pursuit of quick wins – which can derail their financial progress.
- Taking on unnecessary risks. FOMO can push investors to take on higher risks without fully understanding the potential downsides.
The illusion of big gains
One of the most misleading aspects of FOMO is that those talking up an idea rarely share the full picture of their investments. They may boast about being invested in a particular stock that doubled in value, but forget to mention how much of their portfolio was actually invested in it.
For example, your buddy might claim they made a 100% return on a hot investment – but if that investment only made up 2% of their overall portfolio, the impact on their total wealth is minimal. This selective storytelling can give others a distorted view of the potential returns and risks involved.
This highlights the importance of diversification and managing risk. It’s crucial to remember that successful investing isn’t about finding one magical investment, but rather building a balanced portfolio that grows steadily over time.
How to keep the FOMO at bay
To keep FOMO out of your investment strategy, consider these practical steps:
- Know your plan. The best way to avoid FOMO is to have a clear investment plan. This includes setting realistic goals, understanding how much risk you are willing to take on, and choosing an asset allocation that suits your needs.
- Automate your investments. An effective way to remove emotions from investing is to automate your contributions through a regular savings plan (usually by setting up debit orders). Investing a fixed amount at regular intervals, regardless of market conditions, reduces the risk of making impulsive decisions.
- Diversify. Diversification is a proven way to manage risk. By spreading your investments across different asset classes, sectors, and geographies, you reduce the impact of relying on any single asset’s good performance – or suffering from its poor performance.
- Tune out the noise. Financial news and social media are major sources of FOMO. Limiting your exposure to these can help you avoid the temptation to react to every market move. The media loves to tell us how much the JSE or the gold price went up or down every day, but in reality this is meaningless information. What matters to an investor is long-term growth, not short-term volatility.
Understanding risk and reward
The source of FOMO is always seeing or hearing some recent success story. It’s human nature to want to participate in something that’s going well.
But the reality is that it’s almost impossible to rescue a failing investment plan with a high-stakes gamble. What definitely does work, however, is being an investor who sticks to a well-constructed financial plan for achieving financial independence steadily and sustainably.
To discuss your investment portfolio, speak to us.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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