Managing your emotions is a vital part of investing but it can be tricky, especially when it looks like your investments could be faltering. Your emotions can weigh in on every decision you make, but it is sometimes worth tempering them when it comes to your finances.
In fact, new research from high street bank Barclays found that 50% of UK investors have admitted to making impulse decisions when investing, with 67% later regretting it. 30% of those who made impulsive investment decisions cited the fear of missing out, or FOMO, as the main cause.
FOMO forms part of the “herd bias” or “herd instinct” that comes naturally to us all; people tend to feel safer in groups and are happier with the knowledge that they aren’t the only person to have done (or not done) something.
While emotions like these aren’t fundamentally negative, they could affect your investments if you act on them irrationally. So how can you overcome FOMO and avoid damaging your future investments? Read on to find out.
GameStop is a prime example of why FOMO should be avoided
Your emotions play a part in everything you do, and while you should never disregard them completely, it may be worth acknowledging them to avoid FOMO taking over. A recent story that teaches this lesson is the GameStop saga from January 2021.
Users on the social media site Reddit noticed that a prominent hedge fund in the US had bet against video gaming retail company GameStop after a terrible 2020 for the business.
GameStop then appointed three new directors on 11 January, all of who were high-profile individuals in the rise of successful American e-commerce company Chewy. This sparked an interest among many Reddit users, some of which subsequently decided to invest using DIY trading platforms like Robinhood.
Some of these initial investors even began asking other users to invest in order to further increase the stock price, making the hedge funds suffer heavy losses.
In two days, GameStop’s share price rose by 50% to $31.40. With more and more investors jumping in as time went on, the share price continued growing.
Scared to miss out on such an opportunity, thousands of investors jumped in over the course of a couple of weeks. By 27 January, the stock opened at $354.83, and the hedge funds that had bet against GameStop were forced to close due to losses.
This prompted DIY investment platforms to restrict GameStop trading, suddenly dropping the stock price to $112.25 by 28 January.
From then, the share price was in a freefall, and many investors who had jumped in at the stock’s most expensive point lost thousands of dollars. The New York Times report that the “trading frenzy” had created and subsequently destroyed roughly $30 billion in on-paper wealth.
When investing, it is important to make decisions based on both emotion and logic. Don’t risk your money by investing thousands in a company simply because it has done well or because others are doing it. Take the time to plan out your strategy, identify your risk tolerance, and approach every decision with a level head.
Always be wary of trends or fads
Always think before jumping on the bandwagon. Much like GameStop, a share isn’t necessarily going to perform well just because there is increased interest in it. Trends like this are usually temporary, and while they may look attractive in the moment, they very rarely last for a long time.
Trends such as cryptocurrency and, more recently, NFTs are often highly volatile. Though it may look like they offer the opportunity for high returns, they may end up losing you a lot of money.
It’s also worth staying on the lookout for scams, which will often try to mask themselves as a “trend” and guarantee high returns. If you don’t take the time to properly analyse an investment opportunity and invest solely on the grounds of growth potential, you may lose out.
In the year up to April 2021, the Guardian report that investment fraud alone claimed £535 million from 21,989 reported cases. Usually advertised on social media, scams often promise low cost, high return investments and sometimes include fake celebrity endorsements to back their claim.
If an investment offer seems too good to be true, it probably is. It is often worth working with a financial adviser in these situations, as you can verify the validity of various investment opportunities with us, and we can act as a sounding board for your investment strategy and ideas.
Get in touch
If you’d like to find out more about how your emotions may be affecting your financial decision-making, please email info@investmentsense.co.uk or call 0115 933 8433.
Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
