VIDEO: Retirement Investing Pitfall #10 – The Herding Effect

 

This video series on retirement investing pitfalls is pulled from my book Plan Smart Retire Right. Our previous video covered the phenomenon often referred to as the Unbalanced Loss Effect. This video is going to briefly touch on another pitfall, and behavior, called The Herding Effect. While the herding affect in animals is well documented, its impact on investors has come into focus in recent years as well. We are a social species, so it’s no surprise people find comfort in doing things together. This tendency is easy to see in a wide variety of social circumstances such as sporting events, cultural events, and even fads that sweep across a population, only to fade away almost as fast as they began. Think fidget spinners, Pokémon, roller discos, and mullets.

When it comes to investing, time and time again, people are more likely to invest in a stock if it seems to be popular with other investors, friends or family members, perhaps due to this same herding instinct. While this may be helpful, or at least harmless in social situations, when dealing with investing it can often be counterproductive. Given that a fundamental investing principle is to buy low and sell high, if a stock is already popular among investors, the price may be at an elevated level and overvalued. So, investors buying into the stock at these higher prices may be taking more risk than is prudent for their particular situation, especially when investing for retirement. And this can be compounded when we are talking about markets in general, not just a particular stock. Listen, we all get tempted to follow the latest investment fad, and I am not saying that there isn’t potential of them working out, but in my opinion, I think it makes sense to tread lightly and not throw too much money into one particular idea, even if the herd is doing so.