Investing FOMO: Don’t Follow the Herd

Documentaries about animals are fascinating to watch. Maybe you’ve seen footage of bison or other herd animals suddenly stampede due to a predator or other disturbance. Each animal reacts based on the action of the larger group.

Humans can display similar herd behavior. For example, imagine you go downtown to eat dinner at a restaurant. You see two restaurants: Restaurant A is filled with customers and Restaurant B is empty. Which restaurant would you choose? If you’re like most people you will choose the more crowded restaurant, usually with the unconscious assumption that the busy restaurant is better because it is busy.

Picking a restaurant this way is harmless (unless you’re the owner of the empty restaurant!) but this same type of behavior can have negative consequences if it affects how you invest. Herd behavior in investing often works against an investor’s goals of managing risk and achieving long-term gains.

Think about the stampeding bison again. Herd behavior in investing is similar because investors often follow the lead of the crowd rather than doing their own research or sticking to their financial plan.

Like FOMO – fear of missing out – investors hear about trending companies, hot stock picks, or booming sectors and want to get in on the action. If everyone else is investing and they are talking about it on CNBC, it must be a sure bet, right?!

Unfortunately for most people this results in buying when the stock or mutual fund is at its peak or selling a stock or mutual fund when it hits bottom. This is not rational investing behavior and has proved ruinous for many who have followed the crowd.

Part of the problem is that when enough investors are herding it can create bubbles in the market which can lead to market crashes. The “dotcom” bubble of the late 1990s is an example of herd investing. The euphoria surrounding tech company investing swayed the financial media and many investors. Investors jumped on the hot tech trends that everyone was talking about. Never mind that many of these companies had no profits, investors (speculators?) eagerly jumped on new initial public offerings (IPOs), disregarding fundamental security analysis.

Sadly, many investors bought in at the top of the market and incurred heavy financial losses when the bubble burst.

When it comes to investing, don’t run with the herd! You can be on your guard against this behavior by working with an advisor to develop a financial plan or doing your own research and using a controlled decision making process to avoid fear of missing out.

We think that working with an advisor is the best way to avoid herd behavior and has many other advantages as well. Give us a call to find out the ways our Christian financial advisors can help you make progress toward your financial goals and do it in a way that honors your values.



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