Are Your Clients Experiencing FOMO?
FOMO is often discussed in relation to social media engagement, but it’s also commonly experienced by investors – particularly when stock markets are booming. Senior Portfolio Strategist Lara Reinhard and Retirement and Wealth Strategies expert Matt Sommer discuss how financial professionals can address this bias to help preserve the integrity of clients’ long-term investment plans.
What a difference a year makes. During the spring of 2020, considerable effort was put forth by financial professionals to help ease the fears of jittery investors and encourage a long-term perspective. Fast-forward to the spring of 2021: Certain sectors (e.g., technology), new asset classes (e.g., cryptocurrencies) and speculative trading strategies (e.g., Reddit-inspired short squeezes) have captured the attention of investors and, in many cases, generated substantial returns. As a result, some clients may be experiencing regret that these opportunities have thus far passed them by.
This bias, known as “fear of missing out,” or FOMO, can prove devastating when investors depart from time-tested strategies such as modern portfolio theory and begin to make bets that are not aligned with their risk tolerance or time horizon.
The Psychological Origins of FOMO
Oddly, it is often not the potential for double- or even triple-digit returns that drives this behavior, but rather the feelings of anxiety that originate from knowing that others are having more fun or doing something more successfully. FOMO has been extensively studied in academic circles to explain unhealthy engagement with social media networks. But it also characterizes the emptiness some individuals may feel when they do not participate in a novel experience such as trying a new restaurant or visiting a popular destination.
FOMO can be traced to self-determination theory (SDT), which suggests that our psychological health is satisfied through the basic needs of competence, autonomy and relatedness. Competence refers to our ability to successfully act and behave in the world while autonomy refers to our capacity to act independently and by choice.
FOMO is related to the third need – relatedness – which is the ability to feel close and connected to others. Absent relatedness, we tend to experience heightened levels of unease. To mitigate these feelings, we will seek to engage in certain behaviors designed to foster closer connections. In the context of investing, opportunities that garner headlines or are discussed enthusiastically by friends and family are often pursued to fulfill our relatedness need.
Techniques to Help Clients Cope with FOMO
Upon identifying FOMO bias, the initial reaction of some financial professionals is to educate. Client education is an important and valuable tool but may fall short in lowering anxiety levels or curbing suboptimal investment decisions. Alternatively, financial professionals might determine that the best course of action is to accept that the strong impulses clients are feeling are natural and to find outlets to accommodate them – within reason. For example, one technique is to open a separate brokerage account, funded with a limited amount of the client’s wealth, specifically earmarked for speculative and risky investments.
Money is a fungible asset, meaning a dollar has the same value regardless of the financial institution or account in which it is deposited. However, investors tend to view money as a non-fungible asset – meaning they believe it’s unique and can't be replaced with something else. Furthermore, according to the behavioral life cycle hypothesis, individuals assign different weights or levels of importance to different pools of money. For example, the hypothesis posits that current income is viewed as being more valuable than current assets, while current assets are viewed as more valuable than future income. Because of the different assigned weightings, individuals are more likely to commit to saving future income (which they value less) than saving current income (which they value more).
Applying these principles to investing, a financial professional might consider the following mental accounting schematic:
- One pool is funded with safe, liquid assets to be used in the event of an emergency.
- Another pool is funded with most of the client’s wealth, including retirement assets, and is earmarked for long-term security and peace of mind.
- A third pool is established to pursue speculative investment opportunities and is funded with an amount the client is willing to lose in its entirety.
Depending on the institution, each pool may be established as a physical separate account. If separate accounts aren’t practical, the funds can be left commingled, but financial professionals should encourage clients to think about how their money can be used to fund each “conceptual” pool.
FOMO bias can lead to investment and trading decisions that may be detrimental to a client’s long-term financial security. On the other hand, the need for relatedness is wired into the human psyche and its power should not be underestimated. Providing an allotment or allowance to pursue “hot” investments – while limiting the amount to a nonmaterial percentage of overall wealth– may be enough to satisfy clients’ psychological needs while preserving the integrity of their long-term investment plan.
The opinions and views expressed are as of the date published and are subject to change. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes, are not an indication of trading intent and may not reflect the views of others in the organization. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Janus Henderson Group plc through its subsidiaries may manage investment products with a financial interest in securities mentioned herein and any comments should not be construed as a reflection on the past or future profitability. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.
Janus Henderson Group plc ©