Behavioural investing: herding

The Ritcey Report

June 1, 2017

The second in a multi-part series about a key investment issue

The subject of ‘behavioural investing’ – an understanding of the human biases that can often influence a client’s investment decision-making – is one I have discussed in the recent past. I’ve already covered loss aversion. Let’s talk about herding in more detail.

Following the herd

Being hard-wired to follow the herd probably serves some evolutionary survival purpose, but when it comes to investing, mustering the strength to break from the crowd may actually be the superior survival technique. Some key thoughts:

  1. Following the crowd often means buying when prices are too high and selling when prices are too low.
  2. Value-hunters may be able to find equity bargains when others are moving out of equities.

Chasing the market

Buying when prices are too high, then selling when prices are too low, is known as ‘chasing the market.’ This is, emphatically, not a sound investment practice.

The word ‘contrarian’ may sound surly, but zigging when others are zagging is actually the foundation of the basic buy low/sell high investing strategy. When the majority of investors are strongly pessimistic, the entire market can drop.

As investors run for the exits, individual companies, when considered outside the mass hysteria, may actually appear to have solid fundamentals. If not for the market noise, these companies might even look pretty good.

Become a contrarian thinker

Sitting on the sidelines can come at the cost of lost opportunities and potential yield. So how can investors change their behaviour and avoid this pitfall?

Try this: when the herd starts stampeding in one direction, you might want to consider seeking out a new one.

Consider your alternatives, such as diversifying your investments when markets have run up, look for values when markets have declined, and seek out potential income-generating assets you might not have considered before.

That’s where a wealth advisor like me can help you uncover the ideas and tools that work for you. By becoming a contrarian thinker you might find yourself leading the pack.

Dave Ritcey, The Ritcey Team, Scotia Wealth Management, 902.678.0048