Resisting the Lure of the Herd

Moving with a herd may not always produce the best results. Following trends and buying the market is comfortable, but great investments often lay where others fear to tread. It is often more beneficial to seek out the advice of a financial advisor who will help you stick to your given goals, when you are tempted by the crowd, and an asset manager who can guard you against “herding”.

Why do investors tend to herd?

Markets are intimidating to many people and financial decisions can be an emotional process. You may think that other people have information you don’t, which may tempt you to act irrationally. Everyone can’t be wrong.

This, however, can be counterproductive. Emotions can be overwhelming and can get the better of us. We are overly optimistic during the good times and we start assuming that it will be like this forever. This can lead to overpaying for products since we assume their value will keep increasing. When prices eventually fall, investors tend to run for the door, which is counterintuitive. The best time to pick up good bargains is when investments are punished for no reason.

But, sometimes, the herd is right. You need to evaluate the information for yourself and get different opinions: People tend to talk about success more than loss. You need to make informed and rational decisions; therefore you must have a good understanding of exactly what is happening.

It can be difficult to remain rational

Sometimes certain situations can make it difficult to make rational decisions. Certain events can shake business confidence and unsettle investors. While poor sentiment can be a problem, lack of growth is even worse. Certain countries see exponential growth over time, while others stagnate. Stagnation can affect the revenue growth rate, which can severely impact investor confidence. As confidence wanes we see investors leaving a country, which may cause others to follow blindly. Here we see how the herd has the potential to crack an already fragile economy.

How does this affect your investments?

This type of financial environment implies greater risks, thus you need to consider the risks you are willing to take. How much risk are you willing to accept, while chasing greater returns? Your answer will affect your decisions and investment strategy.

A financial advisor will be able to help you analyze your risk profile and choose the correct unit trusts at the right price to complement it. The key to resisting the herd mentality is, from the outset, investing for the right reasons and choosing investments carefully.

How to avoid the herd

These 3 tips will help you resist the ever-present lure of the herd.

  • Take the time to do research

Start by getting as much information and opinions as you can. Ensure that you fully understand the big picture and try and make an informed, rational decision.

  • Consider your long-term goals

Emotions can be a powerful driving factor in your decision making process. A long-term plan can help you to remain calm and rational.

  • Don’t be afraid to seek help

If it all becomes a bit overwhelming then you should consider enlisting the help of an asset manager who can guard against herding. It is also a good idea to consult an independent financial advisor to help identify investments that best suit your risk profile and needs.