Bear Mountain Capital Inc.

FOMO and Personal Finance

| August 28, 2023

Behavioral Finance | Blog | Planning Perspectives

FOMO is the new catchy acronym for a very old phenomenon we know as the “fear of missing out.” While the term is often used in social contexts, FOMO is extremely prevalent when it comes to our personal finances. Oftentimes, we just don’t realize it. 

In this blog post, we’re going to highlight some common situations where we may feel financial FOMO as it relates to our lifestyle, investing, and the hypothetical what-if questions we ask ourselves.

Keeping Up with the Joneses

Keeping up with the Joneses is the analogy that’s often used to describe the never-ending internal competition to match or surpass the possessions, achievements, and lifestyle of our neighbors. In the age of social media, it’s easy to feel like we don’t have enough or aren’t doing enough. Hustle culture is real. 

Oftentimes we’re not directly jealous of another person, nor are we trying to “one up them”, but there are moments where we may feel like we’re not operating on the same level as everyone else. This sense of inferiority can speed up our internal timeline for our life goals and pressure us into making financial decisions that we may not be ready for.

Here are a few examples where financial FOMO could arise: first-time home purchases, home renovations, extravagant travel experiences, large purchases, over the top weddings, extracurriculars for the kids, private school, early retirement, etc.

When it comes to our spending and lifestyle, there’s a healthy balance that we all strive to find. Every now and again, it’s important to take a step back and evaluate our expenses to make sure they are going to goods or experiences that we truly value.

In 1938, research scientists at Harvard launched a longitudinal study hoping to uncover the answers to living a happy and healthy life. The researchers followed the original participants for nearly 80 years, making it one of the world’s longest studies on adult life in history.

The findings of the study revealed that the stronger our relationships are with others, the more likely we are to live a long, healthy, and happy life. It was not about accumulating material possessions, chasing fame, vying for the approval of others, and definitely not keeping up with the Joneses.

We call this FOMO – the lifestyle version. 

Asset Bubbles

It’s fascinating how quickly trends can go viral, then, within the span of a few weeks, slowly fade away forever. Here are a few examples of social phenomena from the past decade that took the internet by storm: the Harlem Shake; the Ice Bucket challenge, the dress color (#teamwhiteandgold), and Pokemon Go.

Just as internet trends can go viral and rise to national prominence, the same can be true when it comes to investing. Whether it’s the housing market pre-2008, the dot-com bubble, crypto, meme stocks, the tulip bubble in the 1600’s, and whichever one comes next; unsustainable asset bubbles can be here today, but quickly gone tomorrow.

Where does overlap lie between viral trends and asset bubbles? Somewhere in the realm of human psychology.

Herd mentality is a type of social bias where we tend to follow and copy what everyone else is doing. We’re social creatures. It’s in our nature to want to fit in with the crowd and we absolutely do not want to be left out, especially when there’s an opportunity to make ‘easy money’… Unfortunately, by the time Main Street gets wind of these trends, it’s usually way too late. 

While it may be “boring”, this is why having a diversified investment portfolio, a consistent savings strategy, and long-term time horizon has proven to be a consistent way to build wealth. But, of course, no one wants to watch media personalities talk about monthly savings and index funds on TV. 

We call this FOMO – the investing version.

What if?

What if I sell my investments and the value immediately increases afterwards?

What if interest rates go down? What if interest rates go up?  

What if you invested a large sum of money and then a global pandemic changes the world?

What if the next available house in the neighborhood is out of your price range?

What if getting new golf clubs doesn’t make you any better at golf? (sorry, I’m projecting here)

In 2011, world renowned psychologist and economist, Daniel Kahneman, released his book, Thinking, Fast, & Slow, which explores the relationship between human psychology and economics. One of the major takeaways from the book is the concept of loss aversion. Loss aversion is the theory that the emotional pain of losing is nearly twice as powerful compared to the emotional joys of winning.

For example, if we were to contrast our emotional response between losing $10,000 versus gaining $10,000 on your investments, it’s likely your emotional response to losing would far outweigh the gains (if this doesn’t stick, imagine adding a few more 0’s to this example). 

This is why stock market sell-offs can feel painful and gut wrenching, while stock market rallies may not generate the same emphatic levels of emotion.

Granted, I’m not a psychologist, but I believe that loss aversion and FOMO are related. Whether it’s actually losing out or just the thought of a decision not going your way – FOMO plays a factor when we ask ourselves the hypothetical “what-if” question.

We call this FOMO – the loss a-version 😉

Recognizing and Managing FOMO

Whether it’s FOMO amongst your social circle or about your financial situation, the remedy to overcoming FOMO likely resides along the lines of finding comfort within yourself and your unique situation. Everyone’s situation is different. This is what makes personal finance an inexact science and difficult to navigate. 

When it comes to FOMO in your financial life, that’s where we can help and where we provide peace of mind for our clients. Whether it’s retiring, becoming financially independent, planning for college tuition, first-time home purchases, managing equity compensation, investing, etc., there are a lot of instances where we may feel like we’re missing out. To navigate the unknown, it’s helpful to see a plan and understand your options before making pivotal decisions.