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The mentality of herd investing

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In the African savanna, or in the deep blue sea, following the herd isn’t just a good idea, it can be a lifesaver for vulnerable animals looking for protection from predators.

On Wall Street, investors want protection, too, but seeking shelter by following the herd can leave you more exposed than protected.

It’s a fine line and thus the “herd mentality” deserves a good definition.

Herd Mentality Defined

By and large, herd mentality is a phenomenon where individual members of a group subvert their will to the added safety, protection and will of that group. In the animal kingdom, the herd is personified through biological groupings (think Cape buffalo, zebras or roach fish that migrate and feed together).

In the investment world, the herd mentality is defined as a “group think” mentality. Here, individual thought is shunned, and investment decisions are made based on the same financial decisions as other investors in large groups (think the dot-com bubble of the late 1990s, or, more recently, the move away from traditional energy investments after oil prices plummeted).

Positive and Negative Herd Mentalities

The distinction in both examples is worth understanding for investors.

Positive Herd Mentality – Zebras or wildebeests that band together face lower odds of being targeted and hunted down by feared predators like lions or cheetahs. That comprises a “good” herd mentality.

Negative Herd Mentality – On Wall Street, abandoning your research, professional advice, risk tolerance, and asset allocation models in the face of extreme market trends, just because seemingly everyone else is doing so constitutes a negative herd mentality.

Behavioral expert Dan Gilbert, who advises investors on money habits and behaviors, says that “following along” can lead investors down the wrong long-term savings path.

“Human beings are not the strongest or fastest animal, but we are the most social animal,” Gilbert says. “Caring about what people think gives us morals, and doing what other people do often makes sense, but sometimes, people do the wrong things. When we do this with our investment decisions, we can get ourselves in trouble.”


“If you do feel the need to follow the emotions, take a step back and give yourself a day or two to review your long-term investment plan.”


Following Along – Even When the Group Is Wrong

As behavioral experts point out, following the herd isn’t always the right thing to do. Our desire to fit in with the group can make us change our behaviors – even when we know the group is wrong.

How wrong? A 2013 DALBAR study shows that most investors don’t “buy and hold,” despite repeated historical evidence that staying the course is an effective wealth-building habit for investors. The average investor, DALBAR reports, buys too high, sells too low, and is generally too quick to pull the trigger, thanks primarily to the urge to follow the market herd.

A Herd-Breaking Action Plan

The way out?

Number one, expect some market jitters – even the most seasoned financial professional can be anxious in volatile markets.

Also, with the help of an experienced financial advisor, create and maintain a solid long-term investment plan with your unique goals in mind. Make it an investment plan that allows you to break from the herd, even when your emotions tell you otherwise. Focus on your long-term strategy, your investment timeline, your risk exposure, and your own personal financial situation.

To stay focused, work with your advisor to rebalance your portfolio on a regular basis, not to adapt to what the herd is doing, but to adapt your goals and strategies to what’s happening to the market over the long haul. That review will help you sell investments at higher prices and buy investments at lower prices, as you follow the rhythms and contours of your long-term investment strategy.

If you do feel the need to follow the emotions, take a step back and give yourself a day or two to review your long-term investment plan. Chances are, you’ll realize you’re on the right path, and will let the herd go off in another direction, while you remain committed to what works for you, and not other investors.

In the end, gaining traction on your investment portfolio is not about following everyone else, it’s seeking bedrock value and opportunity from stable, well-run stocks, funds and industries – no matter what anyone else is doing.



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About the Author

Brian O'Connell is a freelance author

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