FOMO in investing: buying after seeing other investors' gains

An investor who has watched a friend, a colleague, or a Twitter account post screenshots of cryptocurrency or single-stock returns for months may eventually act on the discomfort of being left out. The fear of missing out—FOMO—combines herding behaviour, recency bias, and availability bias into a single decision driver, and it has become one of the dominant explanations for retail buying patterns at the peaks of speculative cycles.

What FOMO is

Fear of missing out is the documented anxiety produced by the perception that others are experiencing rewards that one is not. The phenomenon was named in academic psychology by Przybylski, Murayama, DeHaan, and Gladwell (2013) and has been extensively studied in the context of social media, but its operation in investing predates the term: speculative buying near market peaks driven by the visible gains of those who entered earlier is documented in every major bubble from tulipmania onward.

FOMO is not a single bias but a combination of several. Herding contributes the social-proof component (the sense that what many others are doing must be correct). Recency contributes the time-weighting component (recent gains feel more relevant than long-run averages). Availability contributes the salience component (vivid examples of others' wealth feel more representative of typical outcomes than they actually are). The combination produces a stronger emotional response than any single bias would generate.

The bias is universal—it operates on professional investors as well as retail—but its consequences are most visible in retail buying patterns, where capital tends to chase performance after the fact and crystallise losses when the cycle turns.

How it manifests in investing

The most direct expression is buying assets after seeing other investors post visible gains. The 2017 cryptocurrency rally, the 2020–2021 SPAC and meme-stock rallies, and the 2024 single-stock rallies in selected technology names all featured significant retail inflows that arrived after the bulk of the price appreciation had already occurred. The investors who entered late had little of the upside and most of the downside that followed.

A second expression is in long-running rallies where new money chases the leadership names rather than the broader market. The 2010s mega-cap technology rally produced sustained outperformance of a small set of names, and retail flows into those specific names accelerated as the gap widened—not despite the divergence between price and fundamentals but because of it. The visible outperformance was the FOMO trigger.

A third expression is in the abandonment of pre-defined plans. An investor with a defined risk-targeted portfolio observes a friend's high-volatility portfolio outperform during a bull market, abandons the original plan, and shifts toward the higher-risk allocation just before the cycle turns. The plan was correct ex ante; the abandonment in response to others' gains is the FOMO mechanism at work.

The cost

The cost of FOMO is most visible in dollar-weighted return studies. Morningstar's annual "Mind the Gap" series consistently finds that dollar-weighted returns for narrowly-focused funds (single-sector, single-theme, single-country) trail the funds' time-weighted returns by 2–5 percentage points per year—meaning that investors as a whole entered after the strong performance was largely behind them and exited after the weak performance was largely behind them. The pattern is FOMO buying followed by capitulation selling, and the gap captures the cost.

For individual investors, the cost is the gap between the time-weighted return their chosen instruments delivered and the money-weighted return they actually earned. An investor who DCA'd into a broad equity index over twenty years captured the bulk of the time-weighted return; an investor who lump-sum-deployed at peaks and exited at troughs captured a fraction of it. FOMO is one of the structural drivers of the second pattern.

The cost is also concentrated in specific cycles. Most of the population-level FOMO loss accumulates in the late stages of speculative bubbles, when retail flows are heaviest and the eventual return is smallest. Avoiding the worst of these episodes is more valuable than capturing the typical case, and is the structural argument for committing to a defined plan that survives cycle-end pressure.

What helps

The structural remedy is committing to a rules-based approach that does not consult the investor's emotional response to other investors' visible gains. A systematic strategy that pre-specifies allocation, rebalancing, and signal logic does not have a decision channel through which FOMO can become a portfolio action—the rules execute regardless of what the investor sees on social media or hears at dinner parties.

For investors who construct their own portfolios, the practical remedy is to set the allocation based on long-run statistics and historical evidence rather than on the recent trajectories of specific assets. The historical real return on equities is approximately 5–6%; if a strategy is delivering 50% per year, the strategy is either captured a temporary premium that is unlikely to persist or is bearing risks the investor has not yet seen materialise. Either way, the figure does not justify abandoning a defensible long-run allocation.

FOMO in pfolio

pfolio's systematic strategies remove the discretionary buy decision through which FOMO most often distorts portfolio outcomes. Allocation rules are pre-specified and applied mechanically; the rebalancing process does not consult the investor's response to recent crowd action. The full methodology is documented at how we build portfolios.

Related articles

• Herding behaviour in investing: how following the crowd amplifies market cycles
• Recency bias in investing: why recent returns are a poor guide to future performance
• Availability bias in investing: why vivid recent events distort portfolio decisions
• Optimism bias in investing: why expected returns are usually too high