This week, I’m talking about 5 more mistakes that smart investors don’t make in bear markets. Today’s mistake to avoid is thinking like the herd.
One of my favorite authors, CS Lewis, once said: “When the whole world is running towards a cliff, he who is running in the opposite direction appears to have lost his mind.”
A big mistake that too many investors make in good markets and bad markets, is following the herd. We are social creatures, and without even realizing it, we look to others for signals on how to behave and how to act.
This instinct serves us well in navigating the world and relationships with others, but a problem with this natural social instinct is that we also do it with our investment portfolios.
Our herd instincts explains why when bitcoin grew in popularity and started skyrocketing in price in 2017, no one wanted to be left behind and a lot of people jumped in. Anyone who bought near the peak lost about ? of their investment in just a few short months, and despite a few short-lived comebacks, 1 bitcoin is worth about $6,725 dollars today...a far cry from bitcoin’s peak price of over $19,000 in December 2017.
This same herd behavior and chasing returns also applies in down markets. Money flowing into the stock market and money flowing out often correspond to market tops and market bottoms. In fact, during the last big bear market, the stock market peaked in September 2007 and bottomed in March 2009. Take a guess when money flowing into and out of the market was at it’s greatest. The exact month that the stock market peaked, (the exact month!) the dollars flowing into stocks were their highest. Everyone was buying at the top. Then at the market bottom in March of 2009, the money flowing out of stocks peaked as well. Everyone was running for the exits during arguably the best buying opportunity of a lifetime, and selling at the bottom.
That’s the problem with the herd. They buy at the top, and sell at the bottom, with an alarming accuracy.
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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