.png)
Hot Stocks and Cold Returns: How FOMO Hurts Retail Investors
- Alpesh Patel
- Sep 14
- 4 min read
Chasing the Next Hot Thing - and Paying for It
Retail investors have an unfortunate habit of being their own worst enemies. Time and again, fear of missing out (FOMO), panic or sheer boredom lure individuals away from carefully constructed model portfolios into chasing the latest market darlings.
From meme stocks to crypto crazes, many amateur investors switch strategies at the worst possible moments, invariably with painful results.
As early as 1936, John Maynard Keynes warned that investing is “intolerably boring” without a gambling instinct – and those with it “must pay to this propensity the appropriate toll”. In plainer terms: the thrill of hot trades comes at a cost, usually deducted straight from your returns.
The Behaviour Gap: What the Data Shows
This isn’t just anecdotal. Behavioural finance research consistently finds that frequent trading and performance-chasing lead to underperformance.
A classic study of 66,000 brokerage accounts found that households trading most actively earned a net annual return of only 11.4%, versus 18.5% for those who traded least.
Overall, these retail investors “significantly underperform” benchmark indices after costs. The pattern persists over long periods: one industry study found the average retail investor lagged the S&P 500 by 6.1 percentage points annually over a 20-year period. Even in the bull market of 2023, when the S&P 500 surged over 26%, the typical equity fund investor earned about 5.5% less than the index. Why? Because emotional decisions – selling in fear during downturns and chasing fads in frothy markets – consistently erode investors’ gains. Dalbar’s annual analysis of investor behavior bluntly concludes that “investors tend to sell out of investments during downturns and miss out on rebounds”, sabotaging their long-term returns.
Academic research dubs this the “behaviour gap” – the difference between an investment’s returns and the lower returns investors actually achieve due to poor timing.
One recent study even quantified a “Global FOMO Index” based on Google searches, showing that when public excitement about investing peaks, subsequent market returns consistently disappoint.
In other words, by the time everyone is talking about the “next big thing,” the big gains have likely already been made. As the study noted, surges in hype are “warning signs of a bubble about to burst,” not opportunities. When excitement reaches fever pitch, rational decision-making disappears – replaced by FOMO that “destroys wealth rather than creating it.”
From GameStop to Crypto: Lessons from 2020–2023
The past few years have offered textbook examples. In early 2021, meme stocks like GameStop and AMC rocketed “to the moon” as throngs of retail traders on social media drove shares up hundreds or even thousands of percent. But many small investors only piled in during the frenzy’s peak. As GameStop’s stock inevitably came back to earth, “many retail investors suffered significant losses,” with some losing the majority of their savings. The AI-stock hype of 2023 has a similar echo: Nvidia’s share price tripled in mere months amid AI enthusiasm, and lesser-known names like C3.ai surged on speculation. Latecomers chasing these high-fliers risk discovering that gravity hasn’t been repealed – indeed, those who bought C3.ai near its 2023 highs saw the stock plunge by over 50% within months. And in cryptocurrencies, the boom-bust cycle is even more brutal. Take Dogecoin: fuelled by online buzz and celebrity tweets, it soared over 8,000% in early 2021, then crashed more than 70% just weeks later. Bitcoin’s manic run to nearly $69,000 was followed by a 75% collapse into 2022. Each time, the pattern is the same: waves of FOMO buyers crowd in late, only to hold the bag when reality returns.
Discipline Over Drama - Boring Is Better
None of this is to single out retail investors for scorn - it’s human nature to get caught up in euphoria or to panic at the first sign of trouble. Sticking to a model portfolio can indeed feel dull when everyone else seems to be getting rich quick (or claiming to). But the sobering truth is that jumping from one flashy trend to the next usually ends in disappointment and depleted wealth. Markets have a knack for rewarding patience and punishing the impulsive. A well-constructed, diversified portfolio may not deliver pub-worthy bragging rights, but it also won’t have you chasing your tail or selling at the bottom after a bout of fear.
The message from both data and experience is clear: FOMO is hazardous to your financial health. Yes, the discipline to stay the course – rebalancing, tuning out noise, and avoiding needless switches – can feel like watching paint dry while others ride roller-coasters. Yet time and again, the tortoise beats the hare in investing. As the old saying (updated for markets) goes, sometimes the hottest portfolio move is no move at all. In the end, boring stability trumps exciting chaos – and your returns will thank you for it.
Sources: Financial Times, Dalbar QAIB 2024 report, Barber & Odean (2000), EvidenceInvestor (2023), Wikipedia (GameStop saga), WunderTrading (crypto data).
You Call That Fun? Why Individual Stock Investors Bother - UCLA Anderson Review
The Harsh Truth: Retail Investors Take the Brunt of Market Losses
Microsoft Word - QAIB Report Press Release 2024
FOMO investing: why chasing market excitement destroys wealth
GameStop short squeeze - Wikipedia
Is Dogecoin a Good Investment? Risks, Predictions & Insights
The Behavior of Individual Investors by Brad M. Barber, Terrance Odean :: SSRN
This article is provided for educational and informational purposes only. It does not constitute financial, investment, or professional advice. Past performance is not a reliable indicator of future results, and all investments carry risk, including the potential loss of capital. Readers should consider their individual circumstances and seek independent financial advice before making investment decisions. Alpesh Patel OBE www.campaignforamillion.com
Comments