The psychology of investing: Understanding FOMO and coping mechanisms

 The psychology of investing: Understanding FOMO and coping mechanisms

Author Mark Douglas makes a very good point about investing on the bourses when he says, "If you can learn to create a state of mind that's not affected by the market's behavior, the struggle will cease to exist." Nevertheless, psychology has a greater tendency to influence investors—big or small—than statistics, ratios, and medians.

There is even a phrase for this psychological difference while trading on the stock exchange: FOMO, or fear of missing out.

"Almost everyone ends up doing mistakes such as fence sitting, booking profits all the time, and waiting for a "pullback" to getting back in, etc., because hindsight is 20:20 and nobody really knows where marketplaces are headed in the short run," says Mayank Bhatnagar, the chief operational officer of FinEdge.

"Investors should refrain from making any rash decisions due to FOMO, since these market circumstances may lead investors to take unnecessary risks, especially with indexes reaching all-time highs. Investors using systematic investment plans (SIPs) to carry out their planned investments would be wise. If there is any short-term volatility, staggered investment helps weather it, according to Edelweiss Asset Management's MD and CEO, Radhika Gupta.

As an aside, it should be noted that HNIs (high net worth investors) are equally prone to misinterpreting psychological indications from the stock exchanges.

Regretfully, there are no safe havens on the other side of the fence or while waiting it out.

Although FOMO should discourage ordinary investors from investing, waiting it out isn't the best course of action either since there are always two sides to each story.

According to Shaily Gang, Head of Products at Tata Asset Management, "just waiting might not be a good option."

Gang goes on, "It is about period in the market, not about timing the market."

Because of compounding, the total corpus as a multiple of the money invested increases as you invest more time in the market. The investor would forfeit "time in the market" by holding out for the formation of a market bottom.

By holding onto cash instead of investing, the investor runs a greater risk of losing money than if all SIP tranches had made money in an upwards trending market.

According to Anil Ghelani, Head of Passive Investment & Products at DSP Mutual Fund, "there has been a remarkable change in investor behavior today with competent financial advisors providing guidance to investors."

Instead of concentrating on market timing, more and more investors are emphasizing asset allocation and consistent, systematic investing. This is shown by the gradual growth in monthly SIP inflows to equity mutual funds, which currently total Rs. 16000 crore each month. These inflows include tax-saving ELSS funds and low-cost index funds.

Indeed, there are still hazards for the investor to be aware of. The majority of us check those little applications on our phones or computers every few minutes, and they are among the worst offenders.

The worst thing a retail investor can do is to heed the advise of social media, WhatsApp groups, the internet, or finfluencers! According to Bhatnagar, "all these media disseminate biased advice that is not in the long term interest of any investor."

According to Gupta, investors should avoid following stock recommendations from unofficial sources like social media or WhatsApp groups since they can have vested interests. Instead, the investor should read research papers or consult with professionals in the field.

On the other hand, devoting hours to hours of study on financial markets is also not the solution, since this would lead to "analysis paralysis" and elicit more behavioral biases.

So, how do we go with this?

Retail investors may gain a great deal from the assistance and advice of a disinterested financial professional who will guide their investments in accordance with a well-organized financial strategy. According to analysts, a specialist in this field may also serve as a behavioral coach, supporting retail investors throughout market cycles until they develop confidence in stock trading.

According to Bhatnagar, "much better strategies for wealth creation are adhering to a robust investing process, staggering investments throughout the market through STPs, as well as investing with clear long term goals in mind."

Regarding discipline in the market, Gang states, "An investor who starts SIPs a while ago, at the prevalent levels of the market at this moment in time, would be able to build bigger absolute wealth than the investor who waits to feed the market bottom to form as s/he devotes less time in the market."

Experts nevertheless provide advice on how to proceed even if you want to test the waters when the markets are at high levels.

It might be challenging to decide to invest everything at once during a market surge as one is always afraid that the markets can turn down. Emotionally taxing and challenging is standing by for correction, according to Gupta.

Because they consistently deploy a predetermined amount and achieve rupee cost averaging, Systematic Investment Plans (STPs) or Systematic Transfer Plans (STPs) are thus the most appropriate. They provide a methodical approach to investing without having to worry about timing in any kind of market.

"Investors should remain focused on asset allocation and diversification in portfolios in any market condition," concludes Gupta.