There have been a number of whirlwind rallies this year, from dogecoin’s 12,000% climb in May to “meme stocks” like Gamestop and AMC seeing their prices increase more than tenfold in February. These rallies created a frenzy that saw investors rushing to get a piece of the profit.
And despite the risk of buying high and selling low, many people joined these rallies anyway. Why? FOMO, or the fear of missing out, can cause investors to make riskier choices than they otherwise might, wealth manager and behavioral finance expert Shari Greco Reiches tells CNBC Make It.
Watching others make a lot of money on a certain stock or token having a massive rally may make you feel obligated to join in and get in on the gains, even if the logical part of your brain is telling you that the biggest rewards have already been had.
Additionally, knowing that friends and acquaintances have already had financial success with a certain investment can give you an unfounded sense of confidence about your investment choice, which could result in you ignoring advice from experts that you might normally take, Greco Reiches says.
“They think that they know more than the 5,000 research analysts out there because their friends own [the stock],” she says. “Those are the behaviors that will really derail an investor.”
Despite many people logically understanding that they are more likely to lose money day trading than they are to profit, the desire to get on the bandwagon can be strong, Greco Reiches says.
Investors salivating over the prospect of turning a quick profit should instead focus on how they would feel if their investment results in a major loss, Greco Reiches says.
The volatility of meme stocks and cryptocurrencies and the speed at which their prices can change dramatically makes them even riskier than traditional investments because you could be distracted for less than 30 minutes and come back to see that your portfolio has cratered. “You could be in a meeting at work and it could go down 40%,” she says.
“I sometimes tell people to look back: Have you made mistakes like that in the past?” Greco Reiches says. “How are you going to feel if you act on this and your investment goes down 20% or 30%?”
The excitement of getting in on a bull run may cloud your judgment and lead you to a decision that you may otherwise realize is financially unsound. Greco Reiches recommends finding a partner to discuss a potential investment with, whether it be a friend or family member or financial advisor, before taking the plunge.
“Sometimes just talking it through, you start to hear yourself and you realize what you’re saying is emotional and not intuitive and doesn’t make sense,” she says. “Getting that extra dollar may cost you a lot more in the future.”
That’s in part why you should always do your own research before deciding where to put your money, rather than relying on excitement generated by others. As the SEC warned in 2017, “it is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”