When it comes to investments, don't get tricked by FOMO October 27th, 2022
FOMO is one of a number of defined psychological effects that has a direct effect on investor behaviour. Research into the phenomena describes how it can lead to stress, fatigue and forms of depression. It appears to be more prevalent in younger people than the old.
FOMO can happen at any time but for investors, it becomes more evident during a boom but it can happen during a market crash as well.
Common to both, is that it often happens when the market is close to extreme turning-points.
In the case of a crash, the turning point might be when sellers capitulate.
Capitulation is essentially when investors resign themselves to a belief that there's no hope of a meaningful recovery and sell-out, often at a considerable loss. They do this in the belief that it will protect them from further losses. We saw FOMO capitulation on March 23rd last year, when share-markets realised that the Coronoavirus was a real threat top economic activity.
In the case of a boom, it's often just before an asset price bubble bursts. In this case, the belief is that if they don't buy now, prices will accelerate and make the asset completely unaffordable.
History has seen many examples. In Australia, the last FOMO property surge ended in 2014. Many homes currently on the market are those investors who only now, have seen valuations return to the levels they bought for in 2014.
The "treatment" against FOMO is knowledge and ignoring those with a vested interest. Spending time to have a thorough understanding of what drives prices and the associated risks will allow you to make informed decisions and mininime the effects of FOMO.