A friend called me recently with a severe fever. No, he hadn’t come down with the flu. This was the kind of illness your doctor can’t help you with: Bitcoin fever.
The price of the cryptocurrency Bitcoin had been climbing, more than tripling in price between November and December. It was beginning to look like the sky was the limit.
“I gotta get in on Bitcoin!” he said, and even over the phone I could hear he was FOMO-ing at the mouth.
FOMO, or the fear of missing out, is one of the most powerful psychological motivators for investors to get into the market. As Bloomberg reported last month, with the S&P 500 starting off this year better than the past two decades, people fear missing out on this great “market melt-up” more than the prospect of nuclear war.
With so much money going into the market, Bitcoin is only one example of many securities rapidly rising in value. It’s only natural to watch those values climb and think, I could have been making so much money …
You must keep in mind the universal truth that, sooner or later, markets correct. Stock prices fall when the markets realize they’re inflated. Just accept it now. This will happen! (Investors recently got a taste of this phenomenon, as we recently saw the S&P 500 and Dow Industrials indices drop more than 4% in a single day before bouncing back some.)
Investment educator and founder of The Behavior Gap, Carl Richards studies what we call the Greed Cycle. Imagine a rollercoaster ride. Heading up the first peak, most investors are sitting on cash, waiting to see how high the market will go. They buy near the top (of the Greed Cycle).
Then, inevitably comes the fall. It’s toward the bottom of the valley that fear takes hold and they sell off. The ride continues, going up again to restart the cycle. Richards simply labels the graph “repeat until broke.”
Guess where we are? That’s right, nearing the top. It’s just human nature for money to be pouring into the markets this month. And it will be human nature to panic and sell off in a frenzy on the way down.
How do you break the cycle? How do you keep your FOMO in check so the melt-up doesn’t end up in a personal melt-down? I suggest keeping three rules in mind, even in a time such as this:
1. Always have a written investment plan so you know what you will do, and when. Your best defense against risky emotional investing is predetermined, logical method (portfolio diversity) as your guide, not emotion (stock fads, i.e. Bitcoin).
2. Don’t take more risk than you can afford. Investment is always risky to some extent. There is no such thing as a “sure thing,” and anybody who tells you otherwise is being foolhardy or lying to you.
3. Defy the Greed Cycle. Investment plans can be amended. You can choose to take on additional risk, but always be more proactive than reactive. You need to get in on the action? Okay, but expect the fall. Leave the riskiest gains at the very top of the Greed Cycle on the table for others to lose.
Ultimately, I employed Rule #3 when advising my friend who was just dying to get into Bitcoin. FOMO was keeping him up at night. He needed to get in on the action or he was going to burst.
“If you gotta do it, put in $X,” I told him, “and no more. You can afford to lose it. Good luck.”
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