FOMO stock is often used to describe investing in a stock that is solely driven by fear of missing out. FOMO is a widely used acronym that means, fear of missing out. It is a feeling characterized by anxiety, fear, and stress-related to different aspects of our lives. Although FOMO is common in relationships or the workplace.
This feeling of helplessness, and the idea that you are missing something important, is particularly common when it comes to investing.
Some investors’ decisions are often driven by price action. This creates an urge to buy particular security because the price is going higher. This is especially common in stocks. This is where the term FOMO stock is often used.
Investors may feel they are missing out on a particular stock or investment. This urge to buy or sell particular security based on fear of missing out can have a devastating effect on your investments.
Risks of a FOMO stock
When you make an investment you need to make sure that your decision process is sound. This is why FOMO-driven investment decisions are never a good option. When you let your emotions control your decisions, you are bound to make mistakes.
One of the most common FOMO stock scenarios is when the stock price has increased significantly. Investors afraid of missing out on this opportunity might overlook valuation, and other aspects by buying the stock. The same can happen with short selling. Buying a FOMO stock based on price fluctuations is never a good investment decision.
A FOMO stock is not always driven by considerable price fluctuations. In fact, you might feel compelled to invest in a particular stock due to other factors. Perhaps the business plan is very enticing, or the outlook for the company is very positive.
Being able to control any urge to make an investment decision is perhaps one of the most important aspects of being an investor. No matter how much anxiety, or stress you feel, you should not let your emotions dictate your investments. Making rash decisions based on FOMO is something you should avoid at all costs.
How to avoid a FOMO stock?
Investing is all about having emotional control, and making rational decisions. Being able to control FOMO is a key part of being a successful investor. If you let your induced emotions control your investment decisions, you will most likely end up with poor returns. There are a few ways to avoid FOMO and to always be in control of your investments.
“Know what you own and why you own it” - Peter Lynch
This iconic quote by Peter Lynch is one of the best ways to avoid FOMO stocks. In essence, you should know what stocks you are investing in. This will improve your investment confidence, and allow you to know exactly why you make your investment decisions. Investing based on emotions driven by price action is not how you should conduct your investments. This leads us to another way to avoid investing in a FOMO stock.
Stick to the fundamentals
The debate between technical and fundamental analysis is among the most discussed topics in finance. Although technical analysis is very useful and can help you. Thus, a fundamental analysis should be the driving factor for every investment decision you make.
Looking at stock charts can give a good idea of some aspects, but it does not provide any information on how the company behind the stock is doing. If you make sure that every investment you make is based on sound fundamental principles, you can avoid a FOMO stock.
Avoid making investment decisions based on price fluctuations
This is another important aspect to keep in mind, as an investor. Price fluctuations reflect just the demand, and supply dynamics of a particular stock. Making investment decisions based on how the stock trades, could put your investments at risk. Although the price action of stocks can be a good indicator of when to get in and out of a trade. It should not be the decisive factor.
Define your investment strategy and follow it at all costs
No matter how rational we think we are, emotions still impact our actions. Therefore, a great way of limiting the impact of FOMO in your investments is to define a well throughout the strategy. This way you will be able to stick to that strategy, and avoid emotions driving your decisions.
As we have seen, a FOMO stock is almost always never a good investment. A FOMO stock trade might pose a risk to your portfolio and your returns. As it usually disregards any logical reasons why this particular investment is adequate for you.
Remember to always conduct your investment based on logical reasons. You want to make sure that there is a fundamental reason behind every investment decision you make. FOMO might have a devastating impact on your investments. Being able to control your emotions is among the most critical parts of the investment process.
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