This article is reprinted with permission from Esq. Wealth Management, Inc.
At EsqWealth, we understand that the investment landscape is often influenced by the actions of others. It’s easy to get caught up in the excitement or fear that drives the masses. Imagine a flock of sheep deciding to follow the others up a hill because they’ve heard that the grass is greener just over the ridge. Sure, it sounds like the next big thing, but just as sheep might not be the best at financial decisions, following the herd in investing can lead you astray—or worse, off a cliff.
Herd mentality in finance is no different. While it might feel comforting to join the crowd, it often results in costly mistakes. At EsqWealth, we believe in guiding our clients with a strategic, individualized approach that prioritizes their long-term goals over the latest trends. In this article, we explore the dangers of following the financial herd and provide actionable strategies to help you keep your investments on solid ground (and far away from any cliffs).
Why Do We Follow the Herd?
According to a survey conducted by the CFA Institute, herding was identified as the most significant behavioral bias, affecting 34% of investment decision-making among respondents. That’s a lot of people playing follow-the-leader! But why do we do it? Here are a few reasons:
- Fear of Missing Out (FOMO): When everyone is talking about how much money they’re making on a “hot” stock or an investment opportunity, it’s easy to feel like you’re missing out if you don’t jump on the bandwagon. Just remember, the last seat on the bandwagon is often the most uncomfortable.
- Safety in Numbers: Following the crowd feels safer, especially when the market is as unpredictable as a cat in a room full of rocking chairs. If everyone else is selling their stocks, it can be tempting to do the same—because hey, they can’t all be wrong, right?
- Social Proof: We often look to others to figure out what’s “right.” If a large group of people is making a particular investment decision, it must be the correct choice. But just because everyone else is eating kale doesn’t mean it tastes good.
Impact on Investments and Retirement
Herd mentality might lead you to some regrettable decisions (like that time you invested in Blockbuster because everyone knew it was the dominant player in the video rental market and BlackBerry because every said it was a pioneer in the smartphone industry). Here are a few ways this behavior can impact your financial future:
- Buying High, Selling Low: One of the classic blunders! Herd mentality often drives people to buy stocks when prices are sky-high and then panic-sell when prices drop. Remember the dot-com bubble of the late 1990s? Investors rushed to buy tech stocks at their peak, only to watch their investments fall apart faster than a sandcastle at high tide.
- Increased Volatility: When everyone rushes to buy or sell at the same time, it’s like trying to exit a crowded theater all at once—chaos ensues, and the market becomes more volatile than a toddler on a sugar high. This makes it challenging to predict market movements and stay on course.
- Missing Long-Term Goals: Herd mentality can easily shift your focus to short-term thinking, leading you away from your well-planned long-term investment strategy. Selling during a market downturn might feel like the right move at the time to protect your account from further losses, but it could result in missing the recovery—just when your portfolio was poised for a comeback. Remember how the markets swiftly rebounded from the 34% plunge in March 2020, regaining most of their losses within months as pandemic fears lessened, confidence returned, and the long-term outlook improved.
How to Avoid Herd Mentality
As your financial advisors, we encourage our clients to take a disciplined approach to investing—think of us as your financial GPS, rerouting you away from those herd-induced traffic jams. Here are a few tips to help you avoid the pitfalls of herd mentality:
- Stick to Your Plan: Develop a well-thought-out investment strategy and stick to it, no matter what’s trending on Wall Street. This will help you stay focused on your long-term goals and keep you from getting lost in the noise.
- Diversify Your Portfolio: Don’t put all your eggs in one basket, especially if that basket is the latest investment craze. Diversification can help reduce risk and minimize the impact of market volatility—think of it as spreading your risk across a variety of breakfast cereals.
- Stay Informed: Make informed decisions based on thorough research and analysis. Don’t rely solely on headlines written to attract readers what or on what others are doing or saying—after all, just because everyone’s buying the latest gadget doesn’t mean it won’t go out of style or break after a week.
- Consult with Your Financial Advisor: Regularly meet with your financial advisor (that’s us!) to review your investment strategy and make adjustments as needed. We’re here to provide objective guidance to help you avoid chasing the next shiny object like a cat with a laser pointer.
At EsqWealth, our goal is to help clients avoid the common pitfalls that can derail their financial future. Herd mentality may be prevalent, but with the right guidance, you can navigate the markets with confidence and discipline. Our team is dedicated to being available to clients whenever needed to discuss market conditions, how they impact personalized advice, and strategies tailored to their unique financial situation. So, let’s leave the herd mentality to the sheep and focus on building a secure and prosperous future—together.
The information above is not intended to and should not be construed as specific advice or recommendations for any individual. The opinions voiced are for general information only and are not intended to provide, and should not be relied on for tax, legal, or accounting advice. To discuss specific recommendations for any unique situation, please feel free to contact us.