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How FOMO Is Quietly Sabotaging Investor Decisions

Emotional investing behaviors—especially those triggered by social media hype—can quietly erode long-term returns. A 2020 study by Domonkos Vamossy found that investor excitement—often driven by social sentiment—led to lower earnings announcement returns, translating to an annualized loss of nearly 6% on average (Vamossy, 2020). The problem isn’t just bad timing—it’s that FOMO often overrides discipline.
ByAlexander Harmsen
Fact checked byDiversification.com Compliance Team
How FOMO Is Quietly Sabotaging Investor Decisions

Emotional investing behaviors—especially those triggered by social media hype—can quietly erode long-term returns. A 2020 study by Domonkos Vamossy found that investor excitement—often driven by social sentiment—led to lower earnings announcement returns, translating to an annualized loss of nearly 6% on average (Vamossy, 2020). The problem isn’t just bad timing—it’s that FOMO often overrides discipline.

The CFA Institute also notes that younger investors are especially susceptible, with many relying on social media for financial decisions rather than professional guidance (CFA Institute, 2024). Chasing trends may feel smart in the moment, but emotionally driven moves often end in regret—and lower long-term performance.

This article unpacks how FOMO works, why it’s so dangerous, and how investors can guard against it.

Key Takeaways

  • FOMO often leads to buying after prices have surged—locking in high entry points.
  • Many investors sell too soon or during dips, realizing losses due to emotional decisions.
  • Social media and headline-driven hype can distort risk perception.
  • Building guardrails—like pre-set investing rules—can reduce the influence of FOMO.

The Psychology Behind FOMO in Markets

FOMO is more than a buzzword—it’s a form of social anxiety. When investors see others making money, especially during rapid asset run-ups, it can trigger impulsive decisions. This emotional bias is deeply rooted in evolutionary behavior: following the crowd once signaled survival. But in investing, it often backfires.

A well-known example is the GameStop frenzy in early 2021. Millions of retail investors, spurred by Reddit threads and social media posts, piled into the stock after it had already surged. According to Yahoo Finance data, GameStop's stock price skyrocketed from $18.84 at the end of 2020 to a high of $347.51 on January 28, 2021. By mid-February, it had fallen to about $40–$50 as professional investors started to move away.

The Role of Timing: Why Most FOMO Trades Underperform

Hypothetical: Imagine a 35-year-old investor who buys into a tech ETF after seeing it covered on a trending finance podcast. The fund has returned 40% over the past year, and everyone seems bullish. Within two months of purchase, the sector corrected by 20%. The investor panics and sells—locking in a loss.

This is a textbook FOMO sequence:

  • Entry after rapid appreciation
  • Anchoring expectations to recent performance
  • Exiting during normal volatility due to loss aversion

According to DALBAR’s 2023 Quantitative Analysis of Investor Behavior, the average equity fund investor underperformed the S&P 500 by roughly 3.06 percentage points in 2022—largely due to poor timing decisions triggered by market volatility and emotion. Even seasoned investors aren’t immune. Fear, overconfidence, and reactive behavior continue to erode returns more than fees or asset selection.

Hype Cycles and the Trap of Short-Term Thinking

FOMO thrives in environments of high visibility and low friction. Meme stocks, crypto surges, and hot IPOs are fueled by constant media coverage, social momentum, and instant trading access. The speed and visibility of gains make it hard to resist. Three red flags that suggest FOMO may be influencing a decision:

  • The main motivation is "not missing out"
  • The investment wasn’t on the radar until a recent surge
  • There's no clear plan for when or why to sell

A Better Way to Approach Momentum

Following trends isn’t inherently bad. But the difference between a disciplined trend strategy and FOMO is intent and structure.

Some investors can use momentum indicators and entry/exit rules grounded in historical testing. Others set diversification and rebalancing thresholds that prevent overexposure to fast-moving assets. Practical ways to reduce FOMO’s grip:

  • Pre-commit to investing rules (e.g., never buy after a 20% run-up)
  • Use watchlists to separate research from impulse
  • Automate core portfolio contributions

Want to know how emotionally balanced your portfolio is?  

The behavior that feels safest—following the crowd—is often what hurts most. A simple rule-based investing system, reviewed quarterly, may do more to grow wealth than reacting to market buzz ever will. You can explore tools like PortfolioPilot, which provide portfolio analysis and insights to help you evaluate risk, diversification, and alignment with your financial goals.

FOMO & Behavioral Investing — FAQs

How do hype cycles in assets like meme stocks or crypto fuel FOMO?
Constant coverage, social momentum, and frictionless trading access encourage late participation, often detaching entry decisions from fundamentals and amplifying volatility.
What are common red flags that FOMO may be influencing an investment choice?
Signs include buying mainly to avoid missing out, noticing the asset only after a surge, and lacking a clear plan for holding or selling.
Why does research suggest timing errors erode returns more than fees?
Studies show that reactive behaviors—such as fear-driven exits or overconfident entries—reduce returns by several percentage points annually, outweighing the impact of fees.
How can preset investing rules help reduce FOMO-driven mistakes?
Using rules, such as not buying after large run-ups or maintaining scheduled rebalancing, can limit emotional reactions and improve investment discipline.
Why does following the crowd often harm long-term performance?
Herding can lead investors to buy at elevated valuations and sell during downturns, reinforcing cycles that undermine wealth accumulation over time.
How did the GameStop rally in early 2021 demonstrate FOMO behavior?
The stock’s rapid rise, amplified by social channels, drew investors in at peak levels, followed by a sharp decline that left late buyers exposed.
What practical step can help investors separate research from impulse?
Some investors create watchlists in advance to evaluate opportunities calmly, reducing the likelihood of reacting impulsively to sudden market surges.
Why does easy trading access heighten FOMO risks?
Low barriers to execution allow investors to act instantly on sentiment, increasing the speed and magnitude of emotion-driven trading decisions.
How does loss aversion influence FOMO-related selling?
Investors often overreact to short-term declines, selling quickly to avoid further losses, which can lock in underperformance instead of allowing recovery.
How does FOMO differ from structured momentum strategies?
Structured momentum relies on predefined entry and exit rules grounded in testing, while FOMO is typically reactive, occurring after sharp price increases without planning.