Follow your plan, not the herd

Evidence shows we’re prone to making investing mistakes. And we’re wired to make them again and again.

We’ve taken a look at some common investing behaviours that aren’t so great, and compared them to what academics recognise as best practice – those proven to improve your chances of success.

We’re starting with why it’s important to stick to your own financial plan, particularly in these turbulent times.

This article is not personal advice. If you’re unsure, please seek advice. All investments fall as well as rise in value, so you could get back less than you invest.

What is herd behaviour?

Following the crowd. Doing as others do. Having what she’s having.

With headlines blaring ‘record market lows’ and ‘unprecedented drops’, you’re not alone if you’re feeling spooked and worried. Seeing the value of your investments fall is concerning to say the least, so it’s natural for doubts like, “investing is too risky” to start appearing.

We’re here to warn you that one of the biggest risks is for you to act on this doubt.

It’s difficult to go against the crowd at the best of times, as social creatures we’re drawn to what’s popular and fitting in. But studies show in times of stress, just like where we are now, being different is even harder. The risk of not doing the same as others or being wrong seems much greater.

A pack of lemmings looks like a group of rugged individuals compared with Wall Street when it gets a concept in its teeth

Warren Buffett

Why is following the herd a problem?

Since the market drop earlier this year, we’ve seen two common behaviours among some clients.

• Selling funds and staying in cash
• Selling funds and reinvesting in shares

Both normal transactions in their own right, but neither are without risk.

By leaving the market and moving into cash you’re realising the value of your investments. While that could mean you’ve taken profits, you may also be realising a loss. If your plan is to be invested over the next few years you risk re-entering the market at a much higher price.

Switching from funds to shares might be no bad thing. But in doing so, you are moving from a diversified investment approach, where your money is split across different types of investment, to a concentrated one, where you’re reliant on one or a few companies to deliver your desired investment returns. For most investors we think a diversified approach is best.

Read more about how coronavirus has changed the way we think about companies

How to avoid the herd?

1. Don’t trade the news

Headlines are there to sell newspapers, not to improve your investment performance. Studies have shown that press coverage fails to offer much, if any, insight into the causes of market movements. We can’t stress enough that you should never make investment decisions based on headlines – regardless of whether it’s good news or bad.

2. Go back to your plan

Your reasons for investing are likely to be different to mine. While some are saving for retirement, others might be in retirement. Our own plans, not what everyone else or the market thinks, must guide how we react to new information. When faced with new facts, keep asking these questions:

• Why did you invest in the first place?
• Are there still reasons to hold this investment?
• What, if anything, has actually changed?

Market drops aren’t pleasant but we know they don’t last forever. Unless you have a real reason to change your investment plan, we’d suggest – staying calm, staying diversified, and staying invested if you’re happy to accept the risks.

3. Speak to someone

It can be hard not to make knee-jerk decisions in times of uncertainty. But saying your thoughts out loud to family or friends might help you make more objective decisions. Although it can be uncomfortable, being challenged can help you focus on your reasons for decision-making and sound the alarm on any decisions that may appear irrational.

Speaking to someone who’s qualified and experienced in helping investors make rational, sound decisions like a financial adviser might even be better. They can offer you a fresh perspective on the fluctuations in the market, make sure you stay focused on your long term plan and help you separate emotions from your decisions.

Our financial advisers are carefully selected because of their ability and comprehensive knowledge of investments. You can be sure they are here to help you make the best investment decisions.

If you would like to find out more about advice, contact our advisory helpdesk. Initially they will help you determine whether you actually need advice, for many clients we provide information to assist with managing their investments without paying for advice.

If advice sounds right for you, we'll set up a free initial meeting with a financial adviser. No advice will be given as part of the initial meeting. Please note that if you decide to proceed, charges will apply.

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