Investors make impulsive bets as they succumb to ‘FOMO’ and social media hype, according to Barclays
- Social media, friends and FOMO are the most common influences on investors
- Investors are also struggling to separate their emotions from their investments
- Leads to bad habits like constantly monitoring their investments, survey reveals
Emotional investing and the fear of missing out, or FOMO as it’s known, are among the biggest obstacles to overcome for newer investors, but more and more people are succumbing to it, according to a recent survey.
Investors have piled into meme stocks and popular tech companies this year as the market starts to recover from the worst of the pandemic.
It’s not surprising given many companies have defied the odds and posted strong returns, but a new survey reveals this rush to invest is actually largely borne out of impulsivity.
More and more investors admit to being influenced by social media and FOMO
A third of investors surveyed by Barclays Smart Investor cited social media as their main influence, closely followed by friends (31 per cent), while 30 per cent said their decisions were influenced by the fear of missing out, or FOMO.
Earlier his year, Tuttle Capital Management launched a FOMO ETF to offer investors exposure to the stocks and funds creating the most buzz, including Facebook and Tesla.
The findings also chime with a recent survey by the Financial Conduct Authority, which has repeatedly sounded the alarm on young investors making rash financial decisions off the back of social media hype.
The regulator found social media hype has led to more than three quarters of high risk investors feeling a sense of competitiveness when investing, with 68 per cent likening it to gambling.
Now Barclays’ findings show just how difficult it is for investors to separate their emotions from their investments.
Just under half also feel anxious about their investments and then go on to pick up bad habits, such as constantly monitoring their investments.
Experts have long warned that this kind of emotional attachment can increase the chance of the ‘endowment effect’.
People often place greater value on things they own and will demand more money to sell an item, and it can influence investors’ judgments.
A third of investors said they had made an impulsive investment decision while excited, a fifth when feeling impatient and 16 per cent made a decision out of fear.
Rob Smith, head of behavioural finance at Barclays Wealth and Investment said: ‘Feeling an emotional connection to your investments doesn’t always have to be a bad thing, especially if you use it as a tool to invest in funds you feel passionate about. However, when your feelings start to cloud your decision making, it’s time to take a step back.’
‘It’s understandable that many investors enjoy the thrill and excitement of investing. One compromise investors can make is the ‘core-satellite approach.’
‘Investors may want to put their money into something stable and less exciting, and then add a small, satellite component of investments that gives them more enjoyment, keeps them engaged and gives them an emotional reward – but without causing investors to make any decisions they may regret.’
HOW TO AVOID EMOTIONAL INVESTING
Rob Smith, head of behavioural finance at Barclays Wealth and Investment, shares his top tips to overcome emotional investing.
‘There are a couple of ways that you can try to overcome your emotional biases and work out if you’re attaching too much value to your investments – potentially losing out on good market opportunities:
1. Think about an investment very similar to the one you own, but that’s not in your portfolio.
Try to establish what you would view as a reasonable price for the investment were you to buy it today.
If the value is less than that of your current investment, then you should think about selling.
2. Consider the opportunity cost, as in the money you could be losing out on, by holding your investment – if there are other options that provide better risk-adjusted returns, then you should be looking to sell.
A gain of 5 per cent in isolation may seem attractive, but if this is considered against an 8 per cent gain from another investment with similar risk, then it becomes easier to overcome the bias.
3. Take a look at your portfolio and work out whether you hold any emotional attachments to your investments, and why.
It could be that you’ve inherited them from a close family member, that you used to work for the company in your youth, or that they’re a sustainable investment addressing issues that you care about.
Whilst these are all sound reasons, and very understandable, the reality is that any emotional attachment to your investments can harm your decision making ability – so try and limit your emotions where you can.
When it comes to investing, it’s fine to be led by motivations other than just financial returns, particularly when it comes to ESG investing – but even these investments should be judged as dispassionately as possible and on their merits.
By understanding your emotions, you can try to manage them – giving yourself the best chance of creating a portfolio that is fully diversified and set-up to take advantage of market opportunities, whilst weathering any market storms.