5 Tips to Combat FOMO Investing

Posted Saturday, May 1, 2021

A dogecoin in space

It's never been easier to make spontaneous and uninformed investing decisions based on everyday hype and speculation.

Just a single gif of a rocket ship piloted by Doge or a tweet from a billionaire CEO is enough to send the market into a frenzy and have hundreds of thousands of people scrambling to capitalize on the wave.

With investing being easier than ever, many people are quick to jump on any bullishly recommended investment with little to no first-hand research, just to ensure they don't miss the ever elusive 10x return on their investment.

Well I'm here to tell you that FOMO investing is never a good idea.

In this post, I'm going to talk about what FOMO investing is, why it's dangerous, and what you can do to help fight the urge to jump on viral investing trends.

What is FOMO Investing?

I define FOMO investing as any investment made based on the idea that you're missing out on some significant profits tied to some viral investment opportunity. Some popular recent examples of this are:

  • Gamestop ($GME)
  • Dogecoin
  • AMC ($AMC)
  • SafeMoon (Don't bother looking it up)
  • Anything that r/WallstreetBets hypes up

A father and his son

These are often investment decisions fueled by very strong emotions.

It's tough to sit by and watch friends, family, or even strangers on the internet rejoicing over the 30x profits they've seen in just a single week. Every day that goes by feels like a huge amount of money you're missing out on. Regardless of if you fully understand it or not, you almost feel foolish not throwing some money in whatever the hot investment is.

I want to stress that I do not necessarily think the investments themselves are bad (although they often are), it's the reason for investing, which is an issue.

Let me explain why.

The Dangers of FOMO Investing

While FOMO investing can sometimes result in a nice little profit, there are a lot of risks associated with it. Oftentimes people will pitch things to you as if your investment can only go up, and because of the time-sensitive nature of the opportunity, you may overlook some crucial red flags and fall into a really bad financial situation. Let me run through a few common problems that come with FOMO investing.

Some guy really stressed by whatever is on his computer screen

Buying at the Top

I believe this is one of the most common ways to get burned when FOMO investing.

Missing the wave.

There's a saying that goes, "Buy on the rumors, sell on the news". Basically saying once something becomes mainstream it's usually too late to buy-in.

Someone is always going to buy in at the most expensive price and lose money as the price begins to drop.

As I discussed in my post about timing the market, there's no real way to avoid this. You can react appropriately and mitigate loss if you're really tapped into the markets, but when you're FOMO investing it's easy to overlook market signals as you play catch up to everyone else's profits.

I have two real-life examples of this happening recently.

I recently bought at the top during the recent Coinbase IPO. I kept telling myself that I shouldn't buy in on day one because the price is always at a premium due to first-day IPO hype.

I didn't listen to my own advice.

Everyone including my favorite personal finance personalities was talking about how huge this IPO was going to be and I didn't want to get left behind. I bought two shares pretty much at the peak price, and immediately lost about 20% of my investment within a few hours.

In another example, I had a friend cave and buy into Gamestop when it was really high, and he ended up losing about $1000 because the price dipped and never got close to returning where he bought it.

Don't be us.

Investing in a scam

Beware of the pump and dump!

Essentially the pump and dump scheme goes like this:

  1. Someone buys a lot of (or in some cases creates) a bogus stock, altcoin, or product.
  2. They hype up this investment using false claims or very vague and unnecessarily complicated sales pitches. Often times this will be orchestrated by a large group of people or someone with a large fanbase.
  3. People buy in and drive up the price.
  4. The initial investors cash out and disappear.
  5. All of the everyday investors are left with something that has dramatically dropped in value overnight.

Stay alert because this is much more common than you might think! Although every case might not be a blatant pump and dump (which is illegal), a lot of time investments can be controlled and swayed by a small group of people, leaving unsuspecting investors at their mercy.

Always make sure you understand what you're investing in.

Letting Others Control Your Money

One of the tough parts about FOMO investing is that you almost always feel behind, so you're depending on others to get you up to speed.

In a lot of cases you may never get up to speed, and as a result, you let others guide your investment decisions.

They provide you with convincing data points, tell you why you should buy in, why you shouldn't sell, and why you should buy even more. Do you know what they don't ever tell you?

When to sell.

I've seen people triple their investment, only to end up losing money because they didn't want to sell because people kept telling them the price would go higher.

When you're hyped on emotions and you have people only feeding you the positive reasons to keep investing, you play a dangerous game, especially when you get to the point where your investment is profitable.

Strategies to Avoid FOMO Investing

I want to ensure that you avoid the many pitfalls that come with FOMO investing. If you're investing in something, I want it to be because you've educated yourself and believe in the opportunity, and not just because you follow Elon Musk on Twitter.

Stay on path sign

Only Buy Things You Understand

You don't need to be an expert in every investment position you hold, just do your initial research.

Make sure that you're not investing in a pump and dump scam, a form of cryptocurrency that will be impossible to remove your money from, or some other half-baked opportunity that will end up costing you money.

Look into company websites, read multiple articles surrounding the investment, and form your own educated opinion before investing any of your hard-earned money.

Only Buy Things You Believe In

Once you understand the investment, you can take it a step further and only invest in it if you actually believe in it.

There's a reason Amazon, Apple, Microsoft, Tesla, Bitcoin, and others have had so much positive growth over the years. It's because they offer a compelling and valuable product or service that people believe in and want to support.

Don't buy into something solely based on someone else's beliefs.

If the investment sounds dumb or unrealistic to you, it will likely seem dumb or unrealistic to other people.

If the situation seems too good to be true, it probably is.

Try to avoid ever being in a situation where end up asking yourself, "Why did I even invest in that in the first place?"

Seek Out Dissenting Opinions

This may be one of the most important pieces of advice I can offer.

When investing be careful not to get caught in an echo chamber.

The success stories and the most exciting arguments will always be the ones that get circulated. Dissenting opinions will often get buried or explained away in an effort to maintain hype and enthusiasm.

When looking at dissenting opinions it may sometimes become obvious why you shouldn't invest in something. I can name a dozen times where a simple google search would have saved me a lot of money.

Always look at both sides before investing.

Use Simulated Investing as a Trial Run

This is a strategy I learned when initially experimenting with options trading. A lot of brokerages have tools that allow you to simulate investments based on real stock market data. They'll give you essentially infinite virtual money to play around and trade with.

Use these tools to build confidence in some of your more speculative investments.

After a couple of weeks, you'll know how much money you would have gained or lost if you would have invested immediately, and it should give you more confidence in your decisions about some of your riskier investments moving forward.

I use TDAmeritrade's PaperMoney, but here is a list of resources you can look into.

Buy into existing investments instead

It sounds boring, but sometimes the simplest answer is the right one.

There's nothing wrong with sticking to the financial plan you've defined for yourself. When looking at my own FOMO investments, I would have absolutely seen better returns if I had just invested all of that money into the typical holdings I always invest in.

Yes, you lose the potential upside of hitting big on a jackpot investment, but you also avoid the downside of any major losses you could face. Not only that, but you can avoid the emotional strain that usually comes with the volatility of these types of investments.

Yolo at Your Own Risk

A pair of dice

I get it, some of these recent investment opportunities have been very exciting. I'm not here to be the no fun and no risk police, I'm just here to provide some tips that will hopefully help you make informed and educated decisions in the heat of the moment.

I am not a financial advisor so I cannot tell you what you should or shouldn't put your money into, that's something you need to decide on your own.

Do the research, listen to your gut, stay disciplined, and you should be alright.


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