Although the S&P/ASX 200 (INDEXASX: XJO) and the broader share market has cooled off a bit this week, we have still seen an incredible run-up with ASX shares over the past few months. The ASX had one of its best years in a while last year, with the ASX 200 up over 20% in 2019 (not including dividend returns).
Watching the share market create this amount of wealth is hard to watch from the sidelines. And that's just the market return. If you were also observing shares like Afterpay Ltd (ASX: APT), CSL Limited (ASX: CSL) or Polynovo Ltd (ASX: PNV), I'm sure you would have at least had some pangs of FOMO (fear of missing out, for those of you not up to scratch with your acronyms).
The dangers of FOMO
FOMO is one of the most insidious emotions that investors have to deal with. Ever heard the old saying 'buy low, sell high'? Well, when you feel FOMO, it's actually telling you to ignore this tried-and-true nugget of wisdom.
The higher a stock climbs, the more people tend to fear missing out on even more gains – especially if you 'almost pulled the trigger' on a stock but chose not to back when it was cheap.
But the longer you wait, the more risk there is in making a decision to buy – and that's because you're getting further away from 'buying low' and closer and closer to 'buying high'.
Remember the bitcoin bubble a couple of years ago? That was vastly exacerbated by people watching bitcoin, seeing it run-up in value and not wanting to miss out on the gains. And we all know how that ended.
What to do if you get FOMO
So what's the best way of dealing with FOMO? Well, I think one of the keys to success on the share market is having a cold, logical and unemotional plan, and sticking with it. A lot of investors start out with a plan like this but get overwhelmed with FOMO and greed when stocks are rampaging, and fear and doubt when stocks eventually come off the boil. Following either of these emotional paths usually leads to wealth destruction.
One of the greatest investors of all time – Warren Buffett – takes a different approach. He often says he checks share prices once a week, if that. And he first figures out what price he wants to pay for a company before seeing what everyone else is paying.
Thus, if you find an ASX share that you like, I think a good way of going forward is by asking yourself what price you would be willing to buy and sell. Revaluate these prices as frequently as you'd like, but don't let the markets do it for you.
