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FOMO versus fundamentals

We're living in a time of great emotional, social and economic upheaval – is this driving our investment decisions?

FOMO letters sitting on top of US dollars

FOMO or fundamentals – what drives your investment decisions? For a proportion of investors, emotion or more precisely ‘fear of missing out’ has trumped reason over the past year. 

Since the onset of the Covid-19 pandemic, volatility has pervaded financial markets with wild swings regularly being driven by the irrationality of its participants.

That, according to Greg Davies, a behavioural finance expert at Oxford Risk, is no coincidence given that we are living through times of great emotional, social and economic upheaval.

“If we are stressed it will tend to make our decision-making more emotionally led and we will tend to focus our decisions on shorter time horizons and be less able to take a long-term view.”

The past year has been rife with examples of retail investor behaviour that is, quite frankly, a bit barmy.

April 2020: The wrong Zoom rockets

When millions of people started working from home, investors were quick to catch onto the investment potential of video conferencing app Zoom, However, they mistakenly piled into Zoom Technologies, a tiny Chinese company that makes mobile phone parts and is a so-called penny stock traded over the counter.

January 2021: WallStreetBets takes on Wall Street

Users of WallStreetBets were behind the dramatic rise of high street video games retailer GameStop. In a coordinated move orchestrated on social media, they took out call options on the stock in a move designed to trigger a ‘short squeeze’. As the shares soared, traders who had bet against GameStop were forced to buy it to forestall even greater losses. Volatility spread to the rest of the market, US politicians called for increased regulation and a dose of realism finally saw the stock come crashing down to $40 in February.

January 2021: Musk moves markets

In another case of mistaken identity Elon Musk, tweeted, “Use Signal” – his call for followers to use messenger app Signal over Facebook-owned WhatsApp. This sent shares in Signal Advance, a tiny Texas-based biomedical company, soaring 5,100% over the course of three trading days.

February 2021: Celebrities endorse Dogecoin

In early February, celebrities like rapper Snoop Dog, took to Twitter to indicate their enthusiasm for cryptocurrency Dogecoin. From the start of 2021 to their celebrity-fuelled peak, the coins rose more than 1,500%, albeit they have never exceeded 10 cents.

Gamification over gaming

Retail investing has surged amid the pandemic. On the one hand, this has manifested itself in demand for day trading as sports betters look for an alternative amid a dearth of live fixtures. Younger generations are looking for a piece of the action, too.

Hargreaves Lansdown is one of several investment platforms that has reported record numbers of new customers during the pandemic – many of them younger. Half of those who signed up to Hargreaves Lansdown in the second half of 2020 were aged between 30 and 54. 

Apps like Moneybox and Wealthify use interactive games to illustrate the benefits of investing early in a diversified and low-cost manner.

Getting rich slow

While it might not seem as thrilling as taking on the hedge funds of Wall Street or riding the Bitcoin boom, investing in a range of quality companies with strong fundamentals and owning them for the long term remains the best way to build wealth. Making use of available tax breaks helps money to grow faster, too.

“While some people get into investment in the hope of getting rich quick, the vast majority of ISA millionaires have built a fortune through the far more reliable approach of getting rich slow,” said Sarah Coles, a Personal Finance Analyst at Hargreaves Lansdown.

Secret sauce

The ii platform boasts 731 Isa millionaires and investment trusts account for more than half (54%) of their Isa assets.

This stands to reason when you consider some of the unique features of investment trusts. Their closed-ended nature is a big benefit over the longer term as it allows managers to run their portfolios through good and bad times without the need to sell investments to meet redemptions when investors lose their nerve.

Their ability to gear – to borrow money to invest alongside shareholders’ capital – is another bonus. 

Moira O’Neill, Head of Personal Finance at ii sums it up well: “Isa millionaire status will elude most of us, but it is inspiring to see how they got there. The number one lesson is patience – even millionaires didn’t get there fast.”

Find out more at alliancetrust.co.uk

Stocks mentioned above are for informational purposes only and should not be considered investment advice.

Past performance is not a reliable indicator of future returns. When investing, your capital is at risk. The value of your investment may rise or fall as a result of market fluctuations and you might get back less than you invested.

Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office, River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC gives no financial or investment advice.

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