The bulls are back on Wall Street, but so is dangerous FOMO

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New York: As the smoke from the Canadian bushfires lifts from New York City, the bulls have stampeded from the haze onto Wall Street, and with them an increasingly palpable sense of FOMO.

Last week the S&P500 rallied to enter bull a market for the first time since January, driven by frantic buying in AI and tech stocks as well as hopes that the most talked about recession in American history might be avoided.

Wall Street is covered in haze from the Canadian bushfires.Credit: AP

At the same time, the famous Fear and Greed index ticked into “Extreme Greed” for the first time since February, while the American Association of Individual Investor’s Sentiment Survey found bullish sentiment is at its highest level since 2021 (which was ironically right before the last bear market began).

Now FOMO (the fear of missing out), is drawing retail investors back into the market with purchases of stocks by individual traders also back to late 2021 levels.

“FOMO is a very powerful force,” Michael Purves, an asset manager told Bloomberg last week. “If you missed the rally, you sort of feel obligated to put aside your qualms about risk and get into the market.”

FOMO has been defined by researchers as a fear “that others might be having rewarding experiences from which one is absent.“

When it comes to investing, FOMO is among the most financially destructive emotions one will experience.

Most of us have experienced FOMO in one form or another, whether that be FOMO getting a foot on the property ladder as you see your former classmates buying their first homes, or work-life balance FOMO as former coworkers post on Instagram pictures of themselves “working” remotely from their Airbnb in Bali.

When it comes to investing, FOMO is among the most financially destructive emotions one will experience. The aim of us as investors is to buy low, and sell high, but thanks to FOMO, we often end up buying high and selling low. Or, if you’re like me, not selling at all and bag-holding stocks in denial as they fall month after month.

If you needed an example of the consequences of FOMO just look at GameStop, which is still falling, down 80 per cent from Reddit’s WallStreetBets-induced FOMO in early 2021.

Young investors are especially prone to FOMO, with a recent study from the CFA Institute finding that half of Gen Z investors in the US say they have made an investment driven by FOMO. It also found that for younger investors social media was the primary source of information to “learn” about investing, with Youtube, Instagram and Tiktok among the top favourites.

More worryingly, friends of mine have been recently asking me for stock tips, something that hasn’t happened since the pandemic. It reminds me of the legend of John Rockefeller, who sold all his stocks right before the 1929 crash when he heard a stock tip from his shoeshine boy (i.e. by the time the word hits the street, the smart money has left the building).

In my time trading the Australian market I’ve seen FOMO in crypto, lithium, coal, BNPL and uranium stocks, all of which have fallen from the peak of their social media hysteria. So what can investors do to manage FOMO?

I find the best way to tackle FOMO is to reframe it as a warning signal that a stock price is about to peak, which I’ve coined ‘FOOP’ (fear of over-paying) because often peak FOMO coincides with a short-term peak in a stock price.

However, if this is indeed the start of a longer-term bull market (and not just a bear market rally) it would be irresponsible not to take part. As Keynes once famously said, “the market can remain irrational longer than you can remain solvent.”

Tesla has recorded a 12-day stock market rally.Credit: Bloomberg

Instead of giving in completely to FOMO and betting the house (or modest deposit) on Tesla, which just had a record 12-day rally, take a step back and ask yourself “do I want to buy this stock just because everyone else is buying it, or are there some fundamental or technical reasons to jump into a stock that’s already up 20 per cent in a month?”

Wait for a pullback, consider a smaller purchase (you can always add later), use a stop loss (or be willing to stomach a correction should the market turn against you) and only invest in stocks with sound financials or technicals. Whatever you do, don’t succumb to FOMO, there will always be another opportunity around the corner.

Great investors ignore the noise and stay focused on their long-term goals.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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