Questions to ask yourself before Investing in any Financial Product

Table of Contents

1. Am I being led by FOMO?

Fear of missing out (FOMO) is the fear that someone else is doing something better or more interesting than you are. It’s a common human emotion that’s become much more prevalent recently with the popularity of social media and reality TV shows.

A new financial product is on the block. Everyone is buying it. Are you taking a bite because everyone else is relishing it? Don’t. Alpha is never created by buying what everyone else is buying at a similar or higher price. Goals, not FOMO, should define investment choices.

How FOMO affects Investors

FOMO can have a big impact on you as an investor. When colleagues or friends boast of windfall profits on the stock market, it can cause you to feel envious, dissatisfied with your returns, and questions your own investment strategy. This fear can affect your decision making and potentially derail your investment plan.

4 Tips to avoid Investing FOMO

1. Be cautious with Hot Tips

Investment websites, industry experts, TV shows, colleagues and even family members may all tout the latest tip for the next big thing. Don’t succumb to FOMO and jump into an investment without understanding how it works or the risks. Do your own research and take the time you need to determine whether the investment is worth it or not and fits with your financial goals.

2. Create a Financial Plan and stick to it

Think about the short-and long-term financial goals you want to achieve, your time horizon and your tolerance for risk. Create a financial plan that will help you achieve those goals, and then follow it.

3. Overcome your Behavioural Biases

Whether we’re aware of it or not, there are behavioural biases that can influence our reaction to FOMO. Here are two of the most common ones:

Confirmation bias – We have a tendency to look for information that supports our beliefs and affirms that our point of view is correct. Read more about confirmation bias.
Solution: Seek out information that contradicts what you think about a particular investment.

Overconfidence – Research shows that many people are overconfident in their own investing abilities. We may recognize that, on average, most people can’t “beat the market” by trading frequently. But somehow we feel that we’re the exception. Read more about overconfidence.
Solution: Give yourself a reality check. Even professional investment advisers may struggle to achieve better-than-market returns.

4. Take a Long-Term view

For most investors, investing to achieve goals is a long-term pursuit. Wealth builds gradually over time, rarely overnight. Resist the temptation to panic at bad news or chase after the latest craze. Focus patiently on achieving your plan and avoid making decisions out of fear of missing out.

Basic questions FOMO investors fail to ask themselves

  1. What is a good entry and exit price?
  2. What do you think the potential upside is?
  3. What needs to happen in order for the price to reach your target?
  4. What is the investment horizon? How long do you plan on keeping the investment?
  5. What are the signs that your investment is going as expected?
  6. What are the signs the investment thesis has broken down, and you need to sell?
  7. At what point do you get out of the investment and why?