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Avoid Running with the Crowd

December 11, 2017

Posted in Behavioral

Human beings are wired to go along. Instincts serve us well in many areas, such as avoiding danger or stress. But a reliance on “a gut feeling” is at odds with successful investing, and is a key reason investors fail to achieve satisfactory long-term results. There are several deeply-rooted biological impulses that investors must strive to overcome.

Don’t go with the herd

The most common reason investors fail to achieve satisfactory results over the long term has more to do with temperament than ability. Time and time again, investors choose to buy after prices have gone up and to sell after prices have gone down. When strong bull or bear markets get rolling, we start looking around at what everyone else is doing. If we see others reacting to market swings, it’s fundamentally difficult to go against the crowd. Once you’ve developed an investment plan that is suited for your particular situation and goals, stick with it.

Don’t stay on the sidelines, either

It may be tempting to wait until the market “calms down” before putting your money to work. Because there’s no certain way to gauge this aspect, the market could have risen substantially by the time you are ready to buy, and you may have missed the cheapest buying opportunity. A better strategy would be to make regular periodic purchases, regardless of market highs and lows.

Avoid being unduly influenced

The airwaves & other periodicals are crowded with pundits offering investment recommendations. In the same way we accept what teachers, policemen and doctors tell us, this acceptance of authority is hugely beneficial. But this trust can have negative consequences when extended to those who don’t necessarily have superior information or wisdom. When we see people with important titles, dressed in a suit or uniform, we tend to automatically follow their guidance, and that’s where our instincts can fail us. One expert may say “buy”, while another familiar name says “sell” – who to listen to? Don’t get pulled away from a proven, disciplined approach that you’ve established with guidance from your planner.

Sometimes, simply knowing about these learned automatic behaviors is enough to stay the course, maintaining a thoughtful and disciplined mindset. Remind yourself why you and your planner picked a certain investment strategy in the first place. Arm yourself with knowledge and question authority. And lastly, don’t keep your concerns to yourself. Your planner is happy to address questions, act as a sounding board if you need reassurance, or discuss possible adjustments to your portfolio.



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