8 dangerous reasons to avoid herd behavior when investing | Author: Kalpen Patel | The Capital | June 2021
Hi everyone, thank you for coming back to my blog. I hope you found my last blog interesting and useful, in which I introduced “5 reasons why trying to timing the market is wrong‘.
In this blog, I will introduce the reasons why you should avoid following the trend when making investment decisions, as this will have a huge negative impact on your earnings.
One of the most common behavioral financial deviations is herd behavior. Most of us tend to believe that a large group of people cannot be wrong about something, Research shows that this belief greatly influences our decision.
Humans are also very sociable. For most of us, following a group is a natural behavior, because who doesn’t want to be a member of the group? But just because something is natural does not mean it is wise. The desire to eat chocolate is common, but succumbing to this desire on a regular basis can also have a negative effect.
Examining the dangers of herd behavior will help you avoid it in the future.
When making investment decisions, please pay attention to the following reasons why you should not succumb to herd behavior:
The greatest part of you is the part that is different from other people. Copying others is never the ultimate path to excellence.
· Your biggest investments are probably those where you make your own inspirational decisions.
Good decisions require accurate information, and the opinions of many people do not necessarily provide you with such information.
· When you follow suit, you are likely to shorten your due diligence.
A decision can be based on facts, but it is still irrational. Herd behavior usually precludes rational inspection of available information.
History is full of incorrect examples of large groups of people. At a certain moment, basically, no one believes that the world is round.
· Imagine all the things that people might believe wrongly now.
· Just because many people believe something does not mean it is true.
When many investors keep up with the trend, it’s too late to make a profit. But it is never too late to lose money.
· The potential risks of herd behavior outweigh the potential benefits.
· It is too late for most investors to enter the group, and it is too late to exit.
· The greatest investment is Is not Very sensitive to time.
If following the trend is the main reason for your investment, then you may lack the criteria for exiting the investment.
· You put yourself in a position where you can only follow other investors away. How do you know they are right?
· When other investors start to sell their investments, the value of the investment drops.
· Unless you are one of the first to quit, you put yourself in a position of losing money.
When investors flock to invest, prices will be pushed up by excessive demand.
· It is not uncommon for the investment price to be higher than the intrinsic value of the investment.
· The price of a stock usually rises or falls to its true value, and the overvalued stock will eventually return to reality.
Constantly buying and selling investment is expensive. Not only are there transaction costs, but you may also make yourself pay more taxes by getting benefits more frequently.