We don’t like to admit it, but many of us would sooner choose to mimic the investment behaviour of the crowd than to consider our own preferences and needs. In behavioural finance, the official description of this tendency is herding bias.
This week we look at trend-chasing in investment and suggest an alternative approach that begins with our own risk appetites and goals.
Technology stocks, collateralised debt obligations and BRICs are some of the investment trends that caught on at one time or another over the past few years. Trends can work for a little while, until they stop working. And therein lies the problem, as this writer explains.
A lot of what people call ‘investing’ is really just speculation. They follow transient trends and seek to profit from them. Some succeed, but only for a short time. Most fail. This article includes trend-chasing as one of four reasons many people fail at investing.
For many investors, following trends and gurus is about something more than the outcome. They want the thrill of the chase. That’s fine, but your long-term investment portfolio is hardly the right avenue for thrill-seeking. If you want that sort of excitement, perhaps go to the races instead.