There’s a trait that’s hardwired in all of us that can be potentially dangerous to our financial wellness, and it’s called herd mentality.
Herd Mentality in Finance
Herd mentality comes from the idea that following the crowd will lead to your desired goals based on the assumption that the knowledge of the many must be greater than that of the few, or the actions of the many must be more accurate than the actions of the few.
In behavioral finance, herd mentality is illustrated by investors tending to do what other investors are doing. Possibly the most extreme example of this is panic buying or selling, where our emotions and instinct dictate our decisions versus objective analysis. In other words, it can be easier to justify an investment decision or financial decision if others are doing it.
The History of Herd Mentality
We saw this play out in the dot com bubble of the late nineties, and early two thousands, where many investors purchased US internet technology-related companies regardless of the underlying fundamentals of those companies. This ultimately created a bubble and the market fallout became eminent. The reality is that we may not consciously choose to follow what everyone is doing. It’s hardwired into us.
How to Avoid Herd Mentality
Like all pitfalls related to behavioral finance, herd mentality can be overcome. Tune into the news to stay informed, but don’t take every headline you see to heart. Media companies are paid to draw eyes and ears, not provide pragmatic objective advice to individuals and families. Develop a financial plan with an advisor that is held to a fiduciary standard to do what’s best for you and your family in every circumstance. If you’re not familiar with this standard, it’s okay to ask your current advisor or prospective advisor if they’re held to the fiduciary standard. Your advisor should get to know you on a personal level. What’s important to you and your family, your goals, and your comfort level with investing? Your financial plan should reflect those goals and be reviewed and updated at least annually. Communicate. You should be hearing from your advisor on a regular basis.
However, if you have concerns, you should feel completely comfortable contacting your advisor to vet those concerns. We’re living through volatile times and it’s okay to be concerned! Here at Wealth Dimensions Group, we welcome the opportunity to discuss those concerns and assist you in making financial decisions based on your specific circumstances and goals, not on emotions.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Past performance is not indicative of future results. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.