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Fear of missing out, or FOMO, can be a powerful psychological force that can cause unwary investors to lose big money, according to financial advisers.
A group of British psychologists defined FOMO as the fear that “others may be experiencing rewarding experiences that we lack.” Financial’s adviser Josh Brown uses the term “animal spirits” to describe the concept that investors are guided by emotions.
These days, social media platforms have become a big source of FOMO, sending users messages about “hot” investments like cryptocurrencies, memetic stocks, and special purpose acquisition companies (SPACs). Influencers and experts who promote such assets claim that buyers can make big bucks, but they may hide the risks or not reveal their motives. .
This is not to say that flavor investments of the day will always flop, depending on when the buyer buys or sells. The problem is that investors often only hear about big winners and don’t listen to duds, advisors and experts.
At the Future Proof Wealth Conference in Huntington Beach, Calif., in September, Morgan Housel, author of The Psychology of Money, said controlling FOMO is “perhaps the most important thing in the age of social media. financial skills,” he said.
“People try to hit home runs”
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‘Getting rich slowly’ is generally more sensible, as investments that offer huge growth potential tend to carry more risk and therefore have a higher potential for loss. Accredited Financial Group.
“People try to hit home runs. [winning] Based in Altamonte Springs, Florida, the firm was ranked 95th on the 2022 CNBC Financial Advisors 100 list.
It’s been relatively easy for investors to make money in 2021. A massive surge in stocks and cryptocurrencies has created a million new billionaires.
Last year, various hype and social media communities helped drive investors to buy.
For example, the price of Bitcoin could surge by more than 20% in a day after a single tweet from Tesla and SpaceX founder Elon Musk. February 1, 2021 Tweet It imbues another cryptocurrency, Dogecoin, with a kind of one-size-fits-all quality, calling it “People’s Crypto.”
Reddit’s WallStreetBets community has also created a frenzy for meme stocks such as GameStop and AMC. Rapper and music producer Jay-Z, NBA player Stephen Curry, tennis prodigy Serena Williams, and other celebrities have also endorsed certain SPACs (investments, which are quasi-initial public offerings) and, until recently, Wall Street. It was one of the hottest trends in town.
Depending on when investors traded, FOMO could have cost investors a lot of money.
For example, the price of Bitcoin hit a new high in November 2021 near $69,000, more than trebling in a year. Since then, it has plummeted to about $19,000, about the same price as it was before the dramatic rise.The extreme volatility of GameStop stock has even caused the stock to drop 40% in 30 minutes.
The US Securities and Exchange Commission warned investors last year about celebrity-backed SPACs.
The SEC said, “Celebrities, like others, may be tempted to participate in riskier investments or may be better able to sustain their risk of loss.” It’s never a good idea to invest in a SPAC just because you have it or say it’s a good investment.”
The CNBC Index, which tracks SPAC trading, is down more than 60% over the past year.
“I think very few people understand their risk tolerance and their sense of future regret until things get worse,” Hausl said, adding that in a bull market everyone has high risk tolerance. added.
How Advisors Overcome Investor FOMO
Shaking off that future regret is how top financial advisors try to discourage investors from succumbing to FOMO.
If a client wants to transfer large sums of money to FOMO assets, As Capstone’s financial advisor, he likes to discuss the likelihood of success in achieving specific financial goals, with or without assets. The Downers Grove, Illinois-based firm ranked him 77th on CNBC’s 100 list of financial advisors.
In other words, if the client already has enough money to comfortably retire or afford their children’s college education, why risk more?
Fear of future failure can help discourage clients from making short-term investments – or at least reduce their overall allocation to it.
“Why invest in these speculative assets? They generally want to because they have the potential for higher returns,” Vultaggio said. “But if you don’t have to do it, why do it?”
“The ship is heading for success here,” he added. “We don’t want to do anything that strays us off course.”
Vultaggio advises clients who are adamant about holding FOMO-type allocations to riskier assets, typically needing to limit their positions to a low single-digit percentage of total holdings, and invest with the necessary funds. I am telling you that you shouldn’t. Near or medium term, he said.
Investing in stocks, bonds, and other asset classes always involves some degree of risk, but it is a calculated risk and generally has a historical track record of long-term success, according to The Sun, Calif. Madeleine Maroon, financial advisor at California Financial Advisors, a company based in California, said. Ramon, Calif., ranked him No. 27 on the CNBC Financial Advisor 100 list.
“I need something that has a game plan, but these hot stocks, cryptos, whatever it is, [clients] You have to know that this is their gambling money,” Maroon said.