If you’ve ever watched a nature documentary you’ll know that many animals move in herds.
Animals move in herds for many reasons, but one of the most obvious ones is protection.
If a predator attacks, the risk is spread amongst the herd. One animal will possibly get eaten, but the overwhelming majority will not, so if you’re a gazelle you just have to hope it’s not you!
There’s a level of comfort in moving with the herd, knowing the odds are against being eaten.
Despite the fact humans never face the danger of a Serengeti migration, they also move in herds and quite often it’s against their best interests.
Booms and busts are an example of herd behaviour. As a market rises, it creates attention and people see others making money.
It’s no coincidence that over the past fifteen years data has shown a flood of money wash into the markets right before the end of a boom.
People, reassured by media reports and the actions of family and friends, finally move into the market because they feel safe.
Yet there’s a difference between the herd of animals and the herd of investors – unlike the animal – the investor carries their own risk.
Herd investors find themselves confused with immediate negative returns, in fear they often sell out at the bottom, only to find the market rebound.
It’s at this time quality assets are transferred from weak hands to strong hands, as the herd runs from risk.
This cycle has repeated throughout history – investors being convinced of the safety, or danger, of markets, not through any rational process, but because they’re following others.
As Warren Buffet once said, “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is.”
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we might be Australia’s best financial planner. We think we’re Tasmania’s best financial adviser and
