South Africa’s financial sector can be both vibrant and volatile – which may contribute to local investors succumbing to the siren song of FOMO: the Fear of Missing Out.
The FOMO investment phenomenon – also dubbed “chasing yesterday’s winners” – sees investors sink money into assets of which prices have skyrocketed, hoping for a ride to riches. However, this strategy has proved itself to be high-risk worldwide, and detrimental overall to hard-earned savings.
Flawed logic & why FOMO investing happens
Psychologically, FOMO is driven primarily by emotion. When you add in economic pressures, like inflation hovering around 3-4% in SA, the desire for quick wins becomes harder to resist especially as a younger investor eyeing the possibility of earlier retirement.
The FOMO-affected brain whispers, “This share price has been climbing, so it’ll keep climbing.” This is called hindsight bias, which ignores the fact that past performance is no guarantee of future results (as every mandated disclosure reminds us).
Are there specific triggers to be aware of?
In our interconnected world, global trends bleed into SA markets quickly, and social media platforms trumpeting click-bait success stories – “I turned R10,000 into R100,000 on meme stocks!” – are designed to ramp up emotion. This can fuel feelings of envy and urgency.
FOMO investing kicks in when investors spot a hot performer – for example, a technology stock like Tesla surging 700% in a year, or Bitcoin hitting all-time highs – and rush in without carrying out their due diligence.
Those who bought Tesla shares at its November 2021 peak of around $410 (split-adjusted) would have suffered a 70% loss by the end of 2022, when it closed at $123. Similarly, Bitcoin investors chasing the November 2021 high of $69,000 faced a 77% plunge to $15,500 by November 2022.
Notable South African examples
Locally, we’ve witnessed our own buying frenzies: significant ones being Steinhoff, and also the post-COVID rally in mining shares like Anglo American, which more than doubled its share price before correcting.
The Steinhoff situation in 2018 saw shares plummeting 90% from pre-scandal highs, punishing FOMO chasers who invested late. Similarly, investors buying at Anglo’s 2022 peak of about R828 saw losses exceeding 50% by late 2023, when it dipped below R410.
Clearly, FOMO investing carries risks.
Which risks, specifically?
Three risks of FOMO Investing
- Overvaluation: Assets chased by FOMO crowds trade at inflated prices, detached from economic fundamentals. When reality bites – via interest rate hikes, geopolitical tensions (e.g., the Russia-Ukraine conflict impacting commodity prices) or regulatory crackdowns (e.g., China’s 2021 crypto ban) – corrections can have a brutal impact on investment portfolios.
- Timing pitfalls: Chasing the market often means buying-in near peak prices, increasing your downside exposure risks. Studies from Vanguard show that momentum strategies (i.e., chasing winners) underperform long-term buy-and-hold approaches by 1-2% annually.
- Emotional override: Diversification suffers; investors overload on one “sure thing,” ignoring the need to balance portfolios across equities, bonds, cash and property. And because FOMO fosters herd mentality, it causes panic-selling during downturns. This buy-high, sell-low cycle destroys wealth.
How to mitigate the risks
FOMO feels exhilarating – because it’s gambling, thinly disguised.
As South Africans navigating economic headwinds, let’s prioritise sustainable portfolio growth and remember that true wealth grows through compounding wins over decades, not chasing thrills today.
Adopt a disciplined approach.
Start with a financial plan aligned to your goals e.g., saving for retirement via a Retirement Annuity, or education costs via a Tax-Free Savings Account.
Patience pays; investor Warren Buffett’s mantra – “Be fearful when others are greedy” – has helped investors succeed and build empires.
Gareth Leonard, CFP® CA(SA)
Wealth Manager
