Fear of Losing Out (FOLO) refers to an emotion when an investor feels anxiety about missing potential gains in rising financial markets or overreacts to near-term volatility to take advantage of prices/indices having come down marginally. It’s a psychological concept that’s considered an advanced form of “fear of missing out” (FOMO).
In investing, FOLO is the worry of missing out on further gains from investments, even if it means not withdrawing money at the right time. This is most common in a bull phase, where optimism is prevalent. With equity markets in a bull phase, investors often feel anxious about missing potential gains. This bullish phase can be seen in the number of demat accounts that have opened. Back in 2020, demat accounts were about 4.09 crore as of June 2024. Today it is 16.23 crore representing a remarkable growth of around 300% in a short period of 4 years.
To put the bullish phase in perspective, this is the first time in history that the number of small-cap investors has surpassed the number of large-cap fund investors. Looking at the near-term outperformance, investors are redeeming their investment from gold & debt and going overweight on small and midcaps, possibly forgetting the risk associated with it.
*All the above data are taken from Morningstar Direct and generated in INR,*India 10 yr Gsec = India Fund 10-year Government Securities*Gold = Kotak Gold ETF. The top performer for the year is highlighted in green and the worst performer is highlighted in red.
From the above table, an Investor at the end of 2017 affected by FOLO would have moved money from debt & gold and invested the same in small and midcap, which in turn would have significantly underperformed gold and debt for the following two years.
Similarly, at the end of 2021, an investor at the end of 2021 would have felt the need to invest more in equity by redeeming from gold which would have resulted in significant underperformance in 2022 vis a vis gold.
Separately, a study by SEBI mentions that 7 out of 10 individual intraday traders in the equity cash segment incurred net losses in FY 2022-23 and 9 out of 10 individual traders lost money in the F&O segment during FY24. This alarming statistic reflects the psychological challenge that investors face, wherein in anticipation of quick gains, they are missing out on long long-term compounding benefits of equities, due to being affected by FOLO.
How to overcome FOLO:
- Follow a well-structured diversified investment portfolio that aligns with your financial goals, time horizon, and risk tolerance.
- Reduce one’s exposure to social media and buzzing trends in the market, which will help you control emotions and follow your investment path. Research shows that higher levels of FOLO are associated with lower cortical thickness in the right precuneus part of the brain, and hence there is a scientific reason for avoiding FOLO.
- Looking at past data, one could get a sense of how markets have reacted historically and this should help you make an informed decision rather than an impulsive decision. History may not repeat itself, but often rhymes.
Protecting yourself from FOLO could be one of the most important decisions that you make in a bull market for any asset class.
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