Psychology of investing: What is FOMO and how to deal with it?

“If you can learn to create a state of mind that’s not affected by the market’s behaviour, the struggle will cease to exist,” is a very valid saying for investing on the bourses by author Mark Douglas. However, most investors big or small tend to be affected by psychology rather than numbers and ratios and medians.

This psychological disparity when investing on the bourses, even has a term FOMO or Fear Of Missing Out.

“Hindsight is 20:20 and nobody really knows where markets are headed in the short run, almost everyone ends up making mistakes such as fence sitting, booking profits too frequently and waiting for a “pullback” to get back in, etc,” says Mayank Bhatnagar, Chief Operating Officer, FinEdge.

“With indices at record highs, investors should avoid any hasty decision driven by FOMO, as such market conditions can tempt investors to take undue risks. It will be prudent for investors to continue with their planned investments through systematic investment plans (SIPs). Staggered investing helps ride out short-term volatility, if any,” says Radhika Gupta is the MD & CEO of Edelweiss Asset Management.

For what it’s worth, it’s not just the retail investors but also the HNIs (High Networth Investors who are also susceptible to wrong psychological cues from the bourses.

Unfortunately, the other side of the fence or waiting it out, does not offer safe havens either.

While retail investors should not jump in due to FOMO, taking a step back and waiting isn’t an ideal solution either because that is just another side of the coin.

“Waiting might not be a good option,” says Shaily Gang, Head- Products, Tata Asset Management.

“It is not about timing the market, it is about time in the market,” Gang continues.

Total corpus as a multiple of the capital invested becomes higher as you spend more time in the market on account of compounding. In waiting for market bottom to be formed, the investor would lose out on spending ‘time in the market’.

The investor could lose more by waiting in cash (i.e. keeping the money in hand rather than investing) while all SIP tranches could have earned in a market that turns out to be going upwards.

“Today with prudent financial advisors providing guidance to investors, there has been a remarkable change in investor behaviour,” says Anil Ghelani, Head-Passive Investment and Products, DSP Mutual Fund.

An increasing number of investors are focusing on asset allocation and regular systematic investments, moving away from market timing. This is evident from the slow and steady increase in the monthly SIP inflows into equity mutual funds, including tax saving ELSS funds and low cost index funds, which has now risen to Rs. 16000 crore per month.

But to be sure there are still pitfalls that the investor has to face. And one of the worst offenders is those small little apps on your computer or phone that most of us check every few minutes.

Getting investing advice from the internet, social media, whatsapp groups or finfluencers is the worst thing a retail investor can do! “All these mediums circulate biassed advice that is not in the long term interest of any investor,” says Bhatnagar.

“Investors should be wary of stock tips from unofficial sources like social media or WhatsApp groups, which may have vested interests,” says Gupta; who instead suggests that the investor looks at research reports or takes experts from experts.

On the other side of the coin, spending hours conducting research on financial markets is not the answer either because it would result in ‘analysis paralysis’ and trigger a different set of behavioural biases.

So, how to take this forward?

Retail investors can benefit tremendously from the support and inputs of an unbiased investing expert who will help them invest according to a well-structured financial plan. Such an expert can also double hat as a behavioural coach who can hand hold a retail investor for the market cycles until they gain confidence in equity investing, say experts.

“Following a robust investing process, staggering investments into the market through STP’s and investing with clear long term goals in mind are much better strategies for wealth creation,” says Bhatnagar.

“An investor who starts SIPs earlier, at the prevalent market levels at that point in time, would be able to build higher absolute wealth than the investor who waits for the market bottom to be formed as s/he spends less time in the market,” notes Gang about discipline in investing in the market.

Even if the markets are at elevated levels and you decide to test the waters, experts still share how to go about it.

“When markets are rallying it is difficult to take a call of investing lumpsum as one always feels that markets may correct. Waiting on the sidelines for correction is also difficult and is emotionally stressful,” says Gupta.

Thus, Systematic Investment Plans or Systematic Transfer Plans (STPs) are most suitable as they deploy a fixed amount regularly, resulting in rupee cost averaging. They are a disciplined way to invest in any market conditions without worrying about the timing.

“Asset allocation and portfolio diversification are key in any market condition and investors should stay focused on them,” ends Gupta.

Manik Kumar Malakar is a personal finance writer.