Beware of “FOMO Syndrome”

Over the past few weeks, I have increasingly heard sentiments from investors that sound something like this: “If only I had loaded up on Tesla (NSDQ: TSLA), I would be rich today. I wonder if it’s too late to jump in?”

This kind of thinking highlights regret on missing on a large move up in a stock, and the fear of missing out (FOMO) on further gains. Today I explain why you shouldn’t let that kind of thinking cause you to start investing impulsively.

There are many names that can be substituted in place of electric vehicle maker Tesla, which is up nearly 400% year-to-date. The S&P 500, by contrast, is up 5%. But there are other names in the technology sector, notably Apple (NSDQ: AAPL) and Amazon (NSDQ: AMZN), that have registered huge gains this year despite the global COVID-19 pandemic. It is understandable that you might look at those gains and have regrets at not jumping in.

That’s a dangerous way of thinking. First, by any conventional measure, many of those companies have become grossly overvalued. Tesla, for example, now has a market capitalization of $382 billion. That’s worth more than the combined value of Toyota (NYSE: TM), Volkswagen (OTC: VWAGY), General Motors (NYSE: GM), and Ford (NYSE: F), for a company that sells a tiny fraction of the vehicles than any of these companies sell.

Why is it valued so high? Because of expectations, which may have gotten totally out of touch with reality. Tesla could be experiencing a bubble that can pop in the future. You don’t want to buy in during the late stages of a bubble.

Stick to your long-term strategy…

To be sure, companies that seem to be overvalued can keep going up for a long time. I don’t know where Tesla will go from here, but I do know that it has excessively high expectations built into the stock. That’s a recipe for a lot of risk. When an overvalued company begins to unravel, it can do so rapidly.

Another factor to keep in mind when considering what you “should” have done is you never know when you might have sold that stock you wish you had bought. Numerous people rode the dot-com bubble all the way up, and all the way back down. If you had bought at the top of that bubble, there are companies that have still not recovered their peak values 20 years later. And if there’s one emotion that’s stronger than the FOMO it’s the regret of buying a company that declines by 90%.

So don’t kick yourself for not buying a company that went up, without also considering that there’s no assurance that you would have sold it at the right time and captured those gains.

Stick to your plan. If that plan involves buying speculative companies, then do so. But don’t veer from a plan that you have executed successfully just because you think you might have made more money had you done things a little differently. Certainly, you should learn from mistakes. That includes learning from the big gainers you missed. But don’t invest impulsively, and don’t invest in companies you don’t understand. That’s a recipe for disaster.

Gains of 1,000% are nice, but those always come at high risk. Be sure you are adequately diversified. You shouldn’t treat investing like gambling. You shouldn’t roll the dice and hope for a big score. Always remember that the risks you take come with potential consequences. You must always be prepared to accept those consequences.

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