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Why Should Investors Avoid The Herd Mentality?

Why-Should-Investors-Avoid-The-Herd-Mentality

Do you know what herd mentality is? To put it in laymen’s terms, it means doing what the majority does. Herd mentality is present in everyday situations. For example, imagine you’re visiting a new city and it’s lunchtime. Before you are two local restaurants, one with a snaky long queue, while the other is almost empty. Most of us with the herd mentality would follow the crowd and join the one with more people queuing for it, isn’t it? But when it comes to investing, herd mentality can put you in danger. To put is simply, “Doing what everyone else does, gets you what everyone else gets!”

Here’s why.

Drives Up Market Volatility

Herd mentality has already proven in past episodes that it’s capable of driving up uncertainty in the stock market. This is seen through the rise in crypto bubbles and the fall of certain stocks such as GameStop. The present inflation levels are also worth our attention.

  • Rise of Crypto Bubbles

We have seen a surge in interest in cryptocurrency in recent years. To be very specific, the first crypto bubble was in 2018 where Bitcoin lost 65% of its worth in a month. By the end of that year, cryptocurrencies had dropped by a greater percentage than the stock market had during the dotcom boom. But that’s not all.

The second crypto bubble happened from October 2020 to April 2021, where the cost of Bitcoin increased six times, only to fall again to one-third. Cryptocurrency is a lucrative investment opportunity but is famously unstable with the crypto investment herd reacting swiftly to even the most minor price direction recommendations.

  • GameStop and Robinhood Frenzy

Apart from crypto bubbles, the effects of herd mentality have shown through the GameStop and Robinhood storm. If you don’t already know, several investors wanted to punish investment businesses that relied on shorting equities by pushing up stock prices.

The stocks were then promoted on Reddit which resulted in GameStop becoming the face of their campaign. Thanks to herd mentality and social media following investors, GameStop’s price rose rapidly. But it wasn’t for long after the Robinhood trading platform and others ceased dealing and many lost their entire investments!

  • An Uptick in Current- and Post-Pandemic Inflation

Bringing our insights back to the present moment, herd mentality is also causing an uptick in inflation levels. The consumer price index increased at its quickest rate in almost 15 years, causing market selling pressure. Treasury bond yields have been soaring simultaneously as well. Furthermore, real estate prices are accelerating exponentially, raising concerns about another possible housing bubble caused by herd mentality.

The Need to Embrace Contrarian Thinking

People need to learn from past mistakes and don’t just allow history to repeat itself. It’s easy to be caught up in the crowd, and it’s even tougher to prevent the herding impulse. We understand that going against the investment norm is more about emotional resilience than expertise. Nonetheless, there’s a need to embrace contrarian thinking to avoid panic buying during a bubble and fearful selling during a market crash.

We hope you’re now convinced why investors should avoid herd mentality. We don’t want another crypto bubble, stock rage, or worsening of current inflation levels. Don’t be too quick to follow blindly. Do your research and speak to the right group of investment professionals to influence your decisions.

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