Herd behaviour: things to think about
It’s a part of human nature for people to sometimes follow others for trends, and to fear they’ll be missing out unless they get in on the action. While it might be tempting and comforting to go along with decisions of a larger group, individual investors should be careful about participating in this sort of ‘herd behavior’.
For example, buying a “hot stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition” or selling into a market downturn without planning or careful consideration often leads to investor regret.
Here are some things to think about:
- Be self-aware – Being aware of how behavioural biases impact your decisions could help make you a more informed investor. Decades of research have shown that many financial decisions, especially investments, are often influenced by impulsive judgments, emotions and temptation. Don’t feel pressured to buy or sell, and take the time you need to carefully consider your decision.
- Do your research – Before you make any investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition, understand how it works, and the risks and fees associated with it. Don’t be afraid to ask questions. Ask if there are any market history lessons that are relevant from previous periods like the current one, and consider the impacts of not doing anything at all.
- Make sure your potential choice fits with your financial goals and needs – Discuss your decision with your advisor who can help to look at where you are today and where you want to go. Staying focused on your financial goals will help you avoid making decisions based on your emotions – in good or bad times. Visit GetSmarterAboutMoney.ca to find many other resources to help you define your financial goals, create a plan, and better understand investing and the investment world.
- Be aware of costs – Investors following the latest trend will typically engage in frequent buying and selling behaviour to get in on the latest hot pick. This can result in increased costs and fees for the investor which can affect their overall return on their investments.