Fear of missing out can be a killer for investors. How top advisors keep it at bay

The fear of missing out, or FOMO, can be a powerful psychological force — and it may lead unwary investors to lose bundles of money, according to financial advisors.

A group of British psychologists defined FOMO as a fear “that others might be having rewarding experiences from which one is absent.” Financial advisor Josh Brown uses the term “animal spirits” to describe the concept of investors allowing their emotions to guide them.

These days, social media platforms are a big source of FOMO, bombarding users with messages about “hot” investments such as cryptocurrency, meme stocks and special purpose acquisition companies, or SPACs. The influencers and experts touting such assets claim buyers can earn bundles of money, but they may gloss over the risks or fail to disclose their own motivations.

This isn’t to say flavor-of-the-day investments always turn out to be flops for buyers, depending on when they buy and sell. Problem is: Investors often only hear about the big winners, not the duds, advisors and experts said.

Controlling FOMO “is probably the most important financial skill these days, in the social media era,” Morgan Housel, author of “The Psychology of Money,” said in September at the Future Proof wealth conference in Huntington Beach, California.

It’s generally more prudent to “get rich slowly,” since investments that offer huge growth potential also tend to carry more risk and therefore bigger odds of loss, said Joseph Bert, a certified financial planner who serves as chairman and CEO of Certified Financial Group.

“People try to hit the home run, which is like [winning] the lottery in investing,” said Bert, whose firm, based in Altamonte Springs, Florida, ranked No. 95 on the 2022 CNBC Financial Advisor 100 list.

It was relatively easy for investors to make money in 2021, a year when most asset classes seemed to head nowhere but up. Strong stock and crypto gains minted a million new millionaires.

Various hype-men and -women and social media communities helped nudge investors to buy in last year.  

For example, bitcoin prices could soar by 20% or more in a day following a single tweet from Tesla and SpaceX founder Elon Musk; one February 2021 tweet imbued dogecoin, another cryptocurrency, with a sort of everyman quality, calling it “the people’s crypto.”

The WallStreetBets community on Reddit also fed a frenzy in meme stocks such as GameStop and AMC. Rapper and music producer Jay-Z, NBA player Steph Curry, tennis phenom Serena Williams and other celebrities have also endorsed certain SPACs — investments that are quasi-initial public offerings — and were, until recently, one of Wall Street’s hottest trends.

Depending on when investors bought in and sold, FOMO may have cost them big bucks.

The price of bitcoin, for example, topped out near $69,000 in November 2021, more than tripling in a year. Since then, it’s cratered to around $19,000, about level with prices before its dramatic runup. Extreme volatility in GameStop stock saw share prices sometimes fall 40% in the span of a half hour.

The Securities and Exchange Commission last year issued an investor alert about celebrity-backed SPACs.

“Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss,” the SEC said. “It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.”

A CNBC index tracking SPAC deals is down more than 60% in the past year.

“I think very few people understand their risk tolerance and sense of future regret until things go south,” said Housel, who added that everyone has high risk tolerance in a bull market.

Playing off that future regret is how top financial advisors try to dissuade investors from succumbing to FOMO.

If a client wants to shift a lot of money into a “FOMO asset,” said Aldo Vultaggio, chief investment officer at Capstone Financial Advisors, he likes to discuss with them their probability of success reaching certain financial goals with and without those assets. The firm, based in Downers Grove, Illinois, ranked No. 77 on CNBC’s Financial Advisor 100 list.

In other words, if a client is already on pace to have enough money to retire comfortably or to afford a kid’s college education, why take more risk?

The fear of future failure helps dissuade clients from making the short-term investment — or at least reduce their overall allocation to it.

“Why invest in these speculative assets? They generally want to do that because they could potentially earn a higher return,” said Vultaggio. “But if you don’t need to do that, why would you do it?”

“The ship is on course for success here,” he added. “We want to avoid something that could take you off course.”

Vultaggio tells clients who are adamant about holding a FOMO-type allocation to a risky asset that they should generally limit their position to a low-single-digit percentage of their overall holdings and they shouldn’t invest with money they’ll need in the near or intermediate term, he said.

Investing in stocks, bonds and other asset classes always carries some risk — but it’s a calculated risk that generally has a historical track record of success over long time periods, said Madeline Maloon, a financial advisor at California Financial Advisors, a firm based in San Ramon, California, that ranked No. 27 on the CNBC Financial Advisor 100 list.

“We need something we have a game plan for, whereas these hot stocks, crypto, whatever it may be, [clients] have to know this is their gambling money,” Maloon said. “This is not what we want to rely on for retirement.”