FOMO Isn’t a Strategy: How Emotion Undermines Smart Investing

Fear of missing out. It’s not just a hashtag anymore. In the world of investing, FOMO is a force—quiet, emotional, and often dangerous.

You’ve probably felt it: a friend made a killing on a hot stock, and suddenly your ‘diversified’ portfolio feels like a buzzkill. Or worse—you just sat out a major market move and now feel like you’ve “missed it.”

Let’s unpack what’s really going on—beyond the impulse, beyond the headlines.‍

Please consult your financial professional who is familiar with your particular situation as this information is meant to be educational and broad in nature.   ‍

What Is FOMO in Investing?

FOMO in investing is the anxious belief that everyone else is making money but you. It shows up as urgency—“I need to act now”—but it's rarely grounded in a plan. It often leads people to chase trends, abandon strategies, or jump in and out of markets at the worst times.

The Bias Beneath the Behavior

FOMO doesn’t show up in isolation—it rides the coattails of, and is often amplified by several powerful behavioral biases:

• Herd Mentality – We look to others when we’re unsure. If they’re buying, we buy. If they’re selling, we sell.
• Recency Bias – We overvalue what just happened. A recent dip feels like a trend. A recent rally feels like a new normal.
• Overconfidence Bias – We believe we’ll know when to time it just right. But data often shows we rarely do.

These behavioral patterns are well-supported by academic research. Herd behavior has been modeled as a rational response to uncertainty,¹ recency bias as a cognitive shortcut that distorts judgment,⁵ and overconfidence as a common driver of excessive trading with suboptimal outcomes.² Together, they explain why emotional reactions like FOMO can derail long-term investment discipline.

A Personal Take — FOMO in Real Time

This isn’t theoretical. I’m watching it unfold today, in real time.  

With the market reacting to shifting political winds and new trade policies, investors are splitting into two camps—and sometimes bouncing between both.

1. Markets drop? The instinct is to get out.  
2. Markets rebound? Suddenly, it feels urgent to get back in.
3. It’s FOMO in both directions.
   

First, we fear losing more. Then, we fear missing out on the rebound. Same emotional trigger, different outfit.

The common thread? Emotion.

And it’s tricky. It feels like you’re being practical—tracking the headlines, staying alert. But what’s often happening underneath is a quiet nudge from FOMO, gently pulling investors off their long-term track and into short-term noise.

Behavioral economist and Nobel Laureate Richard Thaler put it best:

"When emotion takes the wheel—especially fear or urgency—investors tend to underperform the very markets they’re reacting to."⁴

Not because they aren’t informed. But because they’re human.

The Potential Cost of Reactionary Investing

The 2024 DALBAR report suggests that emotionally driven, active investing behaviors—such as trying to time the market—continue to drag down investor outcomes. In 2023, the average equity fund investor earned 20.79%, while the S&P 500 returned 26.29%, creating a gap of 5.5 percentage points. That performance lag was the third largest in the past decade.

This gap isn't about access to information—it’s about behavior. Specifically, it reflects the cost of market timing: buying high, selling low, reacting to headlines, and reallocating based on emotion rather than plan. DALBAR’s decades of research consistently point to this pattern—when investors act on short-term impulses, rather than maintaining a steady, long-term approach, they often underperform the very investments they hold.³‍

The Alternative Perspective

Rather than trying to anticipate every market move, many investors benefit from revisiting the foundation: their strategy. Often, this means returning to their Investment Policy Statement (IPS)—not the latest headlines, their neighbor’s gut instinct, or a TikTok influencer’s take on interest rates.

Let’s be honest: it’s unlikely that any IPS recommends “Panic when the market dips. Consult your group chat. Make a trade based on celebrity sentiment.”

Instead, these statements are typically designed to be grounded in evidence-based practices. They may outline an investor’s preferred level of risk (often expressed in terms of portfolio volatility), expectations for the range of potential returns, long-term objectives, risk tolerance, constraints, and a rebalancing strategy. While no plan can remove uncertainty, having one may serve as a valuable anchor.

Today’s portfolio strategies are often informed by decades of research in finance and statistics—disciplines that study how assets behave over time and how risk can be allocated intentionally. It’s not about eliminating emotion; it’s about creating a framework that may help reduce the influence of reactionary behavior when emotions run high.

Reflection can be helpful:

• Am I reacting to headlines, or aligning with my goals?
• Has anything in my long-term plan materially changed—or is it my short-term mindset that’s been disrupted?

Reclaiming the Narrative

FOMO feeds on urgency and noise. Perspective is often sourced from something steadier—the science behind your original investment plan. Market headlines will come and go. Trends will rise, fall, and repeat. And doubt may still show up, even when a plan is in place.

That’s part of the investing experience: human, imperfect, and emotionally charged.

But when there’s space to pause, reflect, and reconnect with broader intentions, patterns like FOMO may become easier to recognize. Not every moment calls for action. Not every fluctuation needs a response. Sometimes, awareness itself is the most valuable signal.

And when the noise feels especially loud, connecting with a trusted coach or financial professional may help bring things back into focus—grounded in your goals, not the headlines.