If your friends jumped off a bridge, would you?
Countless parents in movies and TV shows have asked the question. Maybe you asked your kids, or perhaps your parents asked you.
Teenagers have a frustrating habit of following the pack.
As it turns out, adults also all feel the urge to run with the herd. In fact, there’s a field of study devoted to investor behavior, and one prominent element of that field is the herd mentality.
Like our teenage children and our hunter-gatherer ancestors, we adults feel safety in numbers. Long ago, our ancestors banded together for survival, not unlike animal herds today. Loners weren’t long for this world, and the benefits of following the herd were obvious.
In modern times, there are still many situations that call for a herd mentality. But in the world of investing, following the crowd often isn’t wise.
Banding together with your fellow employees by investing as they do is also illogical. Your goals are different from theirs. Your financial situation is different. Your risk tolerance, your age, and your familial situation are all unique. So when John, Suzy, Larry, and Lila in the break room are pouring their 401(k) dollars into a hot fund, don’t feel pressure to join them. Research your investment options, and stick to your personalized retirement strategy.
Following general market trends is also counterproductive for several reasons. Jumping on a bandwagon because thousands of other investors have joined isn’t good investing; just because they’re doing it doesn’t make it smart. There’s no historical evidence to suggest that people who follow the investing herd are better off.
Actually, history tells a different story: that large numbers of people can be wrong. Investing long-term retirement savings in the dot-com bubble in the 1990s or the real estate bubble in the 2000s wouldn’t have been beneficial. Nonetheless, millions of people did just that.
In fact, if you’re following the herd, you’re probably getting in late on investments that could have been a good short-term purchase prior to being popular. If you see a financial trend and follow it, it probably means you’re buying an already-inflated investment. A trend is a trend because demand has gone to that side of the market. Buying the trendy investment is, by definition, buying it at an inflated price point.
Even seasoned financial professionals may feel queasy as they buck the trends and forge a path away from the herd. Average retirement investors can feel downright jittery about it.
The best way to reassure yourself is to create a sound retirement savings and investing strategy. It should be a guide to help you stay on-track when your emotions tell you to follow the herd. To develop your long-term strategy, focus on your timeline to retirement, your risk tolerance, and your personal financial situation.
Regularly rebalancing your retirement accounts to bring them back in-line with your long-term strategy will force you to sell assets with inflated prices and add assets at a lower price point. Rebalancing allows you to retain a long-term outlook but still take advantage of some well-known advice: buy low, sell high.
Lastly, avoid making investing decisions when you’re feeling emotional about your money. If you feel an overwhelming urge to follow the herd, make yourself take several days to review your long-term strategy before taking action.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.