In 2013, a new word entered the Oxford English Dictionary – FOMO. The fear of missing out. A compulsion to keep up with peers on purchases, lifestyle, and even investing! We all have that Instagram or Facebook friend whose snaps showcase the life of a carefree adventurous backpacker. All we want is a little bit of financial freedom. Will following the crowd get us there?
Anil became an avid stock market enthusiast in 2017. In his free time, he browsed YouTube videos of traders who made millions and tweeted to several renowned stock enthusiasts. Early on, he made a lot of money with social media stock tips. Over the last couple of years, he seemed to have run out of luck. While Anil followed every bit of advice to the T, returns remained elusive. Investing FOMO put him on a rollercoaster of emotions. He was envious, bitter, worried, and dissatisfied. He began questioning his investment strategy and didn’t know which tips to trust and which ones to disregard. And then disaster struck.
The Coronavirus pandemic overturned markets in March. A global recession and a market meltdown because of a virus? Neither Anil nor the experts he followed had anticipated this. The relentless selling in equity markets eroded Anil’s portfolio every day. By May, despite the guilt and disappointment, Anil cut his losses and tried to move on. He liquidated all his investments and stopped his SIPs. Several stocks on Anil’s favourite list were at all-time lows. But what if they fell further. Anil decided to wait till they bottomed out. Amidst this drama, his salary was slashed by 10%.
Despair hit him hard in those months. But it became worse in June. Markets turned around and had a hot streak. Market data from June and July were so removed from the realities of March and April. Opportunities whizzed by. Panic set in. Financial freedom was a distant dream. Had he missed the investing bus?
Causes of Investing FOMO
The silence of notifications in April and May quickly ended in June.
“Markets are up – don’t wait to invest.”
“Invest now – recover lost money.”
“Buy XYZ stock at a target price of – with upside of 20%”
Bogged down by losses, a promising new investment was exactly what Anil needed. The stocks that showed up as notifications from his broker appeared on his Twitter timeline. Next, he spotted them on his daily newspaper. He also found TV news anchors talking about the very same stock! To top it off, an old school friend boasted on an alumni WhatsApp group of the profits he made with this stock pick.
This was the push Anil needed. He seriously questioned not being invested. From every direction, he heard the same thing. Constant signalling across different mediums nudged him forward. The story of his friend making a killing left him feeling inadequate. Anil spent all his time dreaming of the returns he could have made. If only he had the foresight to invest early on to get rich!
Was Anil distinguishing between noise and signal? Or was he simply giving into confirmation bias?
Market & Investment Research
Anil’s obsession with lost returns and gained losses took a toll on his mental health. He constantly switched between investments based on news, tweets, and tips. Instead of making profits, losses were mounting – further affecting his financial goals.
Anil couldn’t figure out what went wrong. It took him time to realize that his information was just opinions from random sources, sponsored posts, and marketing gimmicks. Everybody had their own angle while doling out free advice and they weren’t thinking about him.
What he needed was a sound process driven by investment research. Professional guidance with a SEBI Registered Investment Adviser could rescue him! An unbiased professional review of his investment decisions and a clear investment plan could get turn his portfolio into a return generating engine.
Avoid Investing Mistakes
What’s the sure-shot way to avoid investment mistakes? Anil discovered it in financial planning! Market movements didn’t matter when he stuck to his vision and financial goals. Without a set vision, Anil was going with the flow – downstream.
Anil worked with a financial planner. Together, they achieved the following:
Anil changed his mindset. Instead of asking “How much can I make out of this opportunity?” he began asking “Why did I choose this investment?” and “Will this change help me achieve my goal?” His eyes were glued to the finish line. He figured out where he wanted to be, and reverse-engineered an action plan to get there. Armed with a financial plan, Anil was sure that he’d be able to send his son to a top university in the United States ten years from now!
There was no space for a trading culture in Anil’s financial plan. Instead, he created a record of his financial priorities, drew up a checklist of actions that secured his future, and segregated his short-term and long-term financial goals.
Overcoming Behavioural Biases
First impressions are hard to shake off. We selectively filter and pay more attention to information that supports our opinions. We prefer to ignore contradictory information. This is confirmation bias. Anil experienced this when he was bombarded with information about a particular stock pick from different channels. Anil overcame this bias by learning to accept different opinions and make more informed decisions.
Even if we’re not aspiring traders like Anil, we’re affected by confirmation bias. Have you ever clicked on an ad online or added something to your shopping cart? In an eerie way, it pops up everywhere. When you’re browsing social media or reading newspapers online. Ads are structured to track and retarget. Working with a financial planner can remind you of your financial priorities.
Anil fell prey to herd mentality. When markets swayed in one direction, Anil swayed with them. With a financial plan in place, Anil wasn’t a victim of market mood swings. He became more focused on what mattered to him than what mattered to the market.
Our financial planning exercise is well-structured and process-oriented. Look no for a source of motivation and commitment to achieve your financial goals. Start with a consultation session and let’s improve your financial wellbeing together!