Don’t let FOMO push you into bad investment decisions

Oct 18, 2019
Impulse investing is like pressing every button on a remote to get the TV to work, Ted Richards says. Source: Pixabay.

It’s interesting how easy it is to use our own TV or the microwave at home, but take us out of our comfort zones and into someone else’s house, a simple task like this often becomes difficult.

Reheating food in someone else’s microwave sounds easy, but it can be almost embarrassingly hard to find the start button. Turning on someone else’s TV sounds even easier, but many fail this simple task too (myself included!).

If this sounds like you as well, then what do you do when you can’t make things work? We often revert to pressing random buttons on the remote control to see what happens. By then it’s usually too late and we realise that we’re now making it worse. By now you can’t work out if you’re on HDMI3 or AV2. What seems like a simple task often isn’t.

There’s a phenomenon called the ‘Dunning Kruger effect’, which is a bias we all have in overestimating our cognitive ability. It’s not just operating gadgets – we take a disproportionate amount of confidence into many aspects of life. It isn’t until the feedback loop kicks in that we realise we may not know what we’re doing and we’ve become our own worst enemy.

Investing is no different. Warren Buffett describes how “investing is simple, but not easy”.

Just because you can invest, doesn’t mean you should

We’re all in our comfort zones when the market is going up. We may even feel like we’re geniuses as our investments rise in value. We think it’s easy. But what happens when the market changes? Have you become increasingly concerned about the ongoing trade war headlines or the effect of falling interest rates on your investments?

It’s these moments that we’re out of our comfort zones. Many start reacting the same way they do when struggling to turn on someone else’s television. The pressing of random buttons could be likened to dabbling in new investments outside of your circle of competence and exposing yourself to new risks. In doing so you may become your own worst enemy.

Often it’s in these moments you realise investing is not easy.

Investing your savings is such an important decision in life as it can have a huge impact on your quality of life in retirement. Whether you manage your own investments yourself, or have some form of help from a service like Six Park (where I work) or someone else, it’s always important to be clear about your investment strategy.

Two years ago, Six Park was being inundated with questions about bitcoin and cryptocurrencies. With the benefit of hindsight we can see the irrational ‘fear of missing out’ behaviour going on around the world. At Six Park, we stayed disciplined during these times because we knew that wasn’t our style of investing – it wasn’t us. While some people made a lot of money in this time (and well done to you if you did), many suffered catastrophic losses to their investments – losses that could take decades to recoup.

Around the world, particularly in the US, trading costs are coming down close to $0 per trade (down from around $10-$20 per trade). No doubt this will motivate more people to trade far more than they should. I’m all for keeping your fees low, but be careful if saving a couple of dollars motivates you to make an investment for thousands of dollars.

Most television remotes have way more buttons on them than they really need. Just because they’re there doesn’t mean they need to be pressed all the time. And just because you can invest in something doesn’t mean you necessarily should.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.

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Do you ever suffer from investment FOMO?

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