Investors tend to follow and copy what other investors are doing. This “herd mentality bias” is influenced by emotion and instinct as opposed to independent analysis. Some examples include Ponzi schemes, cryptocurrency trading, and Black Friday purchases.
How does one ensure they’re not being pulled into the herd? Analyze the investment by:
Removing the noise. (Forget where you heard the recommendation from).
Objectively analyzing the risks and rewards associated with the investment.
Explaining the investment to yourself. Does it make sense?
Does the investment sound too good to be true? (It could be ‘too good’ if similar investments earn much less over the same period).
Remember what Warren Buffett said: “What’s hot today isn’t likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don’t follow the herd.”
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