The herd mentality is no way to choose investments

Investing news this year has seen many record days for US markets and solid returns in Emerging markets as well.  Such news heightens the peer pressure to get into the markets, and many people are doing just that, jumping into stocks or Exchange Traded Funds (ETF’s) to get a piece of the pie without any consideration given to risk. It ends up that investors who get a bad case of fear of missing out (FOMO) will buy stocks at their highs and sadly sell them at their lows.

FOMO feeds into one of the core biases all investors face —  following the herd mentality.

As humans, we are wired to be associated with the winning team, the cool crowd. Who wants to be on the losing team? As investors we will gravitate to those “It” investing themes. Weed stocks anyone? How about a little Snap action? Emotions and peer pressure will drive our investment decisions and the story often ends up badly. FOMO is a big catalyst.

How to do we get over FOMO?

The key to getting over FOMO is to take emotions as much as possible out of the investing decision. This is where having an investment plan or investment ideology or some kind of decision-making framework is key.

An investment plan sets the rules of engagement in how you will make investment decisions. It establishes criteria for how you will evaluate investments and what you will do under certain situations. A plan is sticky in that it keeps you disciplined and allows you to frame your decisions more rationally and thoughtfully. In other words, it provides structure and discipline when making investment decisions, a proven alternative to letting FOMO guide investment buys and sells. A fee-only financial adviser or investment coach can help you craft a meaningful investment plan for you.

Having a plan is critical, but you can’t carry it with you everywhere and refer to it all the time. You will be in social situations with your family and colleagues where they will talk and brag on how they made a killing in Facebook stock or some robotics company. FOMO will be in your face. The best way to deal with it is to either change the subject or walk away.

You can’t eliminate FOMO. But with a good investment plan in hand you have a much better chance of managing it. Your portfolio will thank you.

Aman Raina is an Investment Coach and Founder of Sage Investors. Aman helps new and experienced investors who want to be financially secure but feel confused and intimidated by the investing world. They either don’t know where to start or feel they aren’t making progress with their portfolios. Aman teaches and engages them on how to make educated investment decisions so that they can achieve financial freedom with confidence. Follow Aman’s market observations and musings daily on Twitter (@sageinvestors).




This is a test