In everything from politics to investing, majority opinion is very influential. No one wants to miss out on the next big investment opportunity.
The bandwagon effect
When you are driven by the powerful desire to get the best returns, it can be very tempting to follow the crowd that is flocking to the latest hot stock. In fact, it can feel reassuring to know that you are making the same decision as everyone else.
The problem is that crowds are not always safe places to be. Are you following everyone to the goldmine? Or over the edge of a cliff? A classic and frequent example of emotional investing, the bandwagon effect, has a tendency to seriously cloud people’s judgment.
It has been credited with contributing to the market crash of 2008, when investors simultaneously dumped the same asset classes. It was also evident recently as investors priced in the likelihood of a vote to remain in the European Union which triggered the worst day in financial markets for a decade when the UK voted to leave.
Check your emotions at the investment door
Benjamin Graham is considered by many to be the father of value investing, he famously said that “Even the intelligent investor is likely to need considerable willpower to keep from following the crowd”.
Countering the bandwagon effect needs courage. It is difficult to be prepared to zig when everyone else is zagging and on occasion this may not be the right thing to do. Nevertheless, when there is a stampede in the market it is always worth taking a cool-headed time out to understand in depth what you might be getting into. Jumping on a bandwagon can often be the beginning of a downhill journey.
The disposition effect could also impact your investments.
Invest with your head
At Moneyfarm we offer diversified discretionary investment portfolios. Both diversification and discretionary management are great ways to avoid bandwagon effect investing. Asset classes do not rise and fall at the same time, by ensuring you have exposure to multiple asset classes will make reduce the impact of any one asset class and set you on a smoother investment journey. Discretionary management is the ultimate way to take the emotion out of investing, allowing investment professionals to manage your money for you means that your emotions are removed from the equation.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
