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We live in a world where the confluence of the speed of innovation, the complexity of technology, coupled with the emotional pressure of social media makes it very easy to jump in and invest in something without really understanding what it is you just put your money into.
Investing without really understanding what it is can be described by many other words. One of them is gambling.
The term FOMO (Fear of Missing Out) became a household world as social media exploded and has also been attributed to many investors taking action for fear of missing another great opportunity. Sadly, too many investors are allowing the FOMO emotion to pull them into investments they know very little about or even understand the basics of what the company or asset purportedly does.
This year’s Super Bowl featured four advertisements from companies that offer crypto-currency solutions. The remarkable number of ads from that many companies in a new industry has spawned many to opine that there is a clear FOMO mania going on. The ads, one of which featured comedian Larry David and was very funny and well produced, all pushed hard to make the point that if you were not embracing their offer, you would be left behind by history and your peers.
Investors need to check their emotions and get back to basics before they hop on their app and make an “allocation” to that brand new shiny object. The be sure, it can be very tempting to hop on a bandwagon when your friend has made a 1,000 percent return. Even if your friend actually sold that object and in reality, has a phenomenal return, (and many have not taken any profit), it pays to take a breath and think.
Before you invest, ask yourself the questions: “Do I understand what this company or thing does?” “Does it make common sense?” “Does this company or thing solve a problem, a problem that I can understand?” Make sure you read plenty of opposing views to see what they are saying. Just because the price of something keeps going up does not mean that thing actually performs a function worthy of investment.
There are views out there that if you only allocate 1% of your assets to something highly speculative and lose the 1%, who cares? Especially if the company or thing could go up thousands of percent. There is some logic to this, however, willfully putting money into something with no understanding of it brings you much closer to being basic gambling. Moreover, those that are inclined to gamble like this often do not have the discipline to limit themselves to 1%. Many of the recent investors that simply jump in and follow others cannot afford any loss and are using their emergency fund money for things like Meme stock plays.
If you currently have a financial advisor, the basic understanding rule still applies. Do not “nod and smile” if you are not clear on why some of the investments are being made on your behalf. Your advisor will greatly appreciate your questions, and it makes for a much better relationship.
For those investors that are self-directed and have some or are considering “bandwagon” investments, there is a growing number of financial advisors that charge by the hour that you can bounce ideas off. It is far better to speak with a regulated, licensed, credentialed investment professional than to exclusively use your favorite Facebook investing group for a second opinion.
An investors very best investment is in education and understanding, before you take a leap.