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Fear of missing out, or FOMO, can be a powerful psychological force — and, according to financial advisors, careless investors can lose a lot of money.

A group of British psychologists defined FOMO as the fear “that others may have useful experiences that you lack.” Financial advisor Josh Brown uses the term “animal spirits” to describe the concept of investors letting their emotions rule them.

Social media platforms are a big source of FOMO these days, bombarding users with posts about “hot” investments like cryptocurrency, meme stocks, and special purpose acquisition companies, or SPACs. Influencers and experts promoting such assets claim that buyers can make a ton of money, but they may gloss over the risks or not reveal their own motivations.

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This is not to say that popular investments are always failures for buyers, depending on when they buy and sell. The problem is that investors often only hear about the big winners, not the fools, advisers and experts said.

Controlling FOMO is “probably the most important financial skill these days, in the age of social media,” Morgan Howell, author of The Psychology of Money, said in September at the Future Proof conference in Huntington Beach, California.

“People are trying to hit a home run”

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The WallStreetBets community on Reddit has also been buzzing with meme stocks like GameStop and AMC. Rapper and music producer Jay-Z, NBA player Steph Curry, tennis star Serena Williams and other celebrities have also backed certain SPACs — investments that are quasi-initial public offerings — and until recently were one of Wall’s most popular trends. – street

Depending on when investors bought and sold, FOMO could cost them a lot of money.

For example, the price of Bitcoin reached almost $69,000 in November 2021, more than tripling in a year. It has since fallen to about $19,000, roughly the price level before the sharp rise. Extreme volatility in GameStop’s stock caused the stock to drop 40% in half an hour.

Last year, the Securities and Exchange Commission warned investors about celebrity-backed SPACs.

“Celebrities, like anyone else, may be attracted to risky investments or may be better able to bear the risk of loss,” the SEC said. “It’s never a good idea to invest in a SPAC just because someone known to the sponsor either invests in it or says it’s a good investment.”

CNBC’s index, which tracks SPAC deals, is down more than 60% over the past year.

“I think very few people understand their risk tolerance and their sense of regret in the future until things go south,” said Housel, who added that everyone has a high risk tolerance in a bull market.

How Advisors Overcome Investor FOMO

“Why invest in these speculative assets? Generally, they want to do it because they can potentially get more returns,” Vultaggio said. “But if you don’t have to do it, why would you?”

“The ship is on course for success,” he added. “We want to avoid anything that might throw you off course.”

Vultaggio tells clients who are hell-bent on FOMO-type risky asset allocation that they should generally limit their exposure to a low single-digit percentage of their total holdings and should not invest money they will need in the near to medium term, he said.

Investing in stocks, bonds and other asset classes always carries some risk — but it’s a calculated risk that usually has a historical track record of success over long periods of time, said Madeleine Malone, a financial adviser at California Financial Advisors, based in San Ramon, Calif. , which was ranked #27 on CNBC’s Top 100 Financial Advisors list.

“We need something that we have a game plan for while these hot stocks, crypto, whatever it is, [clients] should know it’s their gambling money,” Malone said. “That’s not something we want to count on in retirement.”

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