Much of the recent rise in the market has been attributed to FOMO, which is the acronym for "Fear of Missing Out." As the market has climbed steadily higher in V-shaped fashion, more and more investors become concerned that they will never have an opportunity to put cash to work at attractive prices.
What is most interesting is that FOMO is an emotional reaction that pushes us to trade or invest in a less disciplined way. Rather than buy stocks when they offer the most attractive risk-to-return ratio, investors are driven to buy them to an even greater degree the less attractive they look technically. Our fear of missing out becomes greater the more the market continues to act in an irrational way.
FOMO is frustrating because it arises when we have been doing the right thing. It doesn't arise out of mistakes. It arises when the market is doing the unexpected and we are sticking to a solid plan.
The best way to deal with FOMO is to be aware that it is going to occur no matter what you do. It is the nature of the stock market to act at times in a way that will makes us feel like we have screwed up. That is the way that trading and investing work. We will never feel we have made the absolute best choices because the market is always going to act in unpredictable ways.
Rather than focusing on what we are missing, we should be focusing on what we doing. Should I buy this stock right now because the market is going straight up and I'm holding too much cash and I'm not making the gains that others appear to be making? Is this a chart you would normally buy or are you more inclined to buy it because you fear missing out?
The core illogic of FOMO is that if you fail to chase stocks higher then you will never have an opportunity for attractive entries again. That is the feeling that we are dealing with but if you have traded for a while then you know that there is always a new crop of opportunities. In fact, the more disciplined you are then the more likely there will be even better opportunities.
When I start to feel some FOMO, the first thing I do is start looking harder for charts that meet my criteria for buying. If I can't find any then I have to ask myself if I really want to throw money at something to avoid this uncomfortable feeling that everyone is making big bucks except for me.
If you are going to give in to FOMO then at least make sure you manage risk. If you chase a widely extended stock then have a plan in place in case the momentum suddenly reverses. Chasing an extended market driven by FOMO can work in the short term but only if you understand what is going on and don't start believing that this time is different and stocks are never going to pull back again.
FOMO has finally cooled off a bit Tuesday although that is probably due to anticipation of a slew of major earnings reports that create a new wave of emotions.
