By nature human beings are drawn to a Herd Mentality. It can be
evidenced in new fashion trends, technology, social norms, and even
the stock market. Ideas and trends start small with only a few
early adopters jumping on board. Then as acceptance grows the new
trend starts to become the new norm. It is this inherent need to
follow the herd that prevents some people from joining trends too
early on.
Think about where you would be now if you would have joined in
on the mobile phone and Apple technology boom early on? Or if you
would have been the first on the scene during the internet boom of
the nineties? These were incredible trends, but only a few people
joined the movement early, why didn't everyone jump on board when
these ideas first came out? Looking back on it now they seemed so
obvious.
The stock market can be viewed in the same context. More often
than not it's the disciplined investors that ignore and often go
against market sentiment that make the most money. For example look
at the cover of Barron's from just before the market bottom in
March of 2009.
During the time this magazine was published the markets were
full of hysteria and many investors were running for cover.
Everywhere you looked there was negative news and a recovery seemed
far off. The Herd Mentality was telling investors that it was not
socially acceptable at the time to be buying stocks. As a result
nervous investors sat out of the major rally that was to ensue.
Since the bottom in March of 2009 the Dow is now up over 90%.
Emotions, not logic, typically regulate the average investors'
decision making. If the hot investment of the day is gold or
annuities, then average investors will follow suit since there is a
perceived safety in numbers. Investor psychologists and financial
behavioral scholars have confirmed this phenomenon in countless
case studies. Better investment decisions require you to understand
and control your emotions allowing you to avoid becoming your own
worst enemy. In other words, in order to be a successful investor
you have to stay out of your own way.
The best way to take your emotions out of investing is to adopt
a strict investment strategy. This strategy should guide you
through your investment decisions, and not allow for you to get
caught up in the dangerous herd that surrounds investing.
The intent of this article is to help expand your financial
education. Although the information included may be relevant to
your particular situation, it is not meant to be personalized
advice. When it comes to investing, insurance and financial
planning, it is important to speak to a professional and get advice
that is tailored to your unique, individual situation. All
investments involve risk including possible loss of principal.
Investment objectives, risks and other information are contained in
the Snider Investment Method Owner's Manual; read and consider them
carefully before investing. More information can be found on our
website or by calling 1-888-6SNIDER. Past performance is not
indicative of future results.