STOCK market rallies often see vulnerable investors rushing to get a piece of the action.
They simply do not want to miss out on potential profits even when the stock market is overheated and is ready for a bust.
This can be seen during the dotCom era, the cryptocurrency craze, the gloves stock rally and many others rallies.
Rising stock prices in a rally often put an investor’s emotions to test and the fear of missing out (FOMO) can be overpowering. People want to earn more money but some end up making bad investment calls.
FOMO surfaces when you are not invested in a stock or a sector but it starts running up a lot, a report said.
“There are different types of investors such as the early adopters and the majority. Normally the early adapters win and get their gains. But it is often too late for the majority.
“If you want to give in and follow, use money that you do not mind losing, though I would highly recommend not doing it,’’ Kimberly Law, a licensed financial planner at IPPFA Sdn Bhd, said.
She said FOMO can cause investors to make irrational decisions that can potentially harm their personal finances.
“This normally happens when the people around you are investing and showing off their gains, and you do not want to miss that opportunity and ride on the bandwagon, which may be heading for a bust.”
She believes FOMO can be dangerous because it is hard to detect and avoid.
“Some people don’t even know they are in it, as FOMO happens often when you are influenced by your surroundings to do something about your finances,’’ she said.
While the intention may be good as it is meant to accumulate wealth, the result can be disastrous and the losses can often be insurmountable if one got carried away.
Doing irrational things makes one regret in hindsight and these mistakes are sometimes even made by the most seasoned investors, another report said.
“For example, your friend may be saying it is a good investment opportunity and asks you to join. It’s great if it works out but what if it doesn’t, is it your friend’s fault?’’ Law asked.
She said people often hear about the wins and gains and not the losses.
“It becomes very trendy because someone made a lot of money and you also want to make that gain. Somehow, when things don’t end well, everyone goes silent and no one talks about it,’’ Law added.
Exchanging stock tips is also common in a heated market. It is like exchanging recipes but who really gets to eat the cake well done would depend on the timing in the oven, measurements and ingredients used.
“What you should do is rather than focusing on what you could have earned, think about what you could have lost in haste,” Law said.
There is also too much information available out there. The need to filter and stick to legitimate information is vital when making investment decisions, she said.
When people make wrong decisions and are still in denial, they will find ways to justify their actions.
“You can do your own research and seek information to support your decision (even if it is wrong) but people often choose to listen to what they want to hear,’’ she added.
If you are tempted and do not want to miss out on making more money when there is a stock market rally, then simply check with professionals, preferably a licensed financial planner, said Law.
“Always remember who is giving you the advice, as there is too much information out there. Beware of those social media influencers or Instagram and YouTube personalities who are not financial experts.
“There are also many financial blogs that do not have (the right) financial background, so it is important to check the source of your information before making investment calls,’’ she said.
By all means, invest during a rally. But experts will tell you not to make decisions in a haste and emotional investing should be avoided. Try not to cash out when markets are bearish and not to follow the herd mentality when stocks are surging.
FOMO is common and greed can be overpowering in an overly heated market. You can avoid being in such a situation if you have a long-term financial plan and stick to it.
Review it often and while you rely on experts, do your own research as the money is yours – either you gain or you lose.
As they say, good behaviour is a vital component of successful investing. But some will still justify their actions even though what led them was greed and FOMO.