People act like herds in all circumstances that allow for herd behaviour. In most situations this is not a problem, but in the world of investment it can cause you serious issues and land you in financial difficulty. Here’s why.
Ignoring Statistical Analysis could Equal a Harmful Investment
When looking at a potential portfolio, a relatively safe method of judging its success at market is to view its statistical performance history.
By doing so you can examine trends and patterns in the stock’s (and related portfolio’s) past, and make relatively accurate predictions regarding how it will perform in the future. Following the herd can lead you away from this type of decision making.
A herd mentality, instead, can lead you into an investment in a share that could be potentially harmful. This is because you have failed to do the appropriate level of statistical analysis.
Following the Crowd can Lead to Getting Trapped in a Bursting Bubble
As with the collapse of the US housing market in 2010, investment bubbles are potentially incredibly financially damaging. Consequently, if you make a bad investment in the wrong stock, you could find yourself collapsing down alongside a bubble.
Following the herd over the past decade has been a large contributing factor to the increase of the housing bubble. Furthermore, investing in property – particularly by networks of foreign investors – has resulted in one of the worst economic downturns of the last century.
Thinking critically and individually about the investment cost of a mortgage could have prevented the mortgage rate inflation we saw through the 21st century. Even today in the UK, the news is that mortgage deposits are at their highest ever point- roughly 10% on average.
The government’s new plan to introduce 95% mortgages is arguably a reactionary response to the hike in deposit prices. However, it in itself could lead to a second housing bubble. So beware, and don’t get trapped inside an investment which is likely to burst.
Following Markets Prevents you from Achieving Success
According to Bernard Baruch, an economic advisor to Woodrow Wilson and Franklin Roosevelt, you should never follow the market exactly. This is simply because following the market will mean that you will never get out ahead of it and make any serious profit.
Furthermore, by following the crowd, you’ll make all of the same mistakes as everybody else. It therefore pays to try alternative strategies, and to be innovative: be a leader, not a follower.
Ignore Irrational Advice and Strike while the Iron’s Hot
Finally, when you spot a good investment, go for it. Don’t let the fact that other people are ignorant of it bother you. Similarly, avoid letting your current financial situation stand in your way of buying shares.
The window of opportunity for a good investment may only be an hour, so ensure you have accessible funds. If that means taking out a short-term loan then so be it.
Ultimately, don’t let other people’s advice and decisions deter you from what you know is a legitimately safe and sensible investment. When it’s time for you to invest, don’t let the herd deter you.
