When it comes to investing it is important to realize herd mentality-the masses following each other when a trend or phenomenon is occurring, is very common and can be dangerous if caution isn’t used. Everyone has different goals, risk appetite, timeline, and other factors that should be considered when making an investment decision. When you see advertising for certain investments; i.e. gold coins, options trading, and bitcoin to name a few being pushed on the masses because “everyone is doing it” really makes me shake my head.
Fear of losses prevents a lot of people from investing in the stock market or other investments, but what really gets lost is the feeling of missing a “trend” and not evaluating your own personal circumstances. Exhibit A is bitcoin over the last few years. People were seeing stories of investors making tons of money on the digital currency and they wanted in as the price in early 2017 was around $1,000/coin and peaked at the end of that year just shy of $20k/coin. There was a lot of press around the new currency and the mania just got bigger and bigger. I recall getting phone calls at my prior job asking if they can buy it in their 401k, which thankfully for most isn’t possible. Well someone late to that party got crushed as the price collapsed in the next six months from its peak of $19k/coin to $6300/coin, about a 68% decline. The blockchain technology is pretty interesting don’t get me wrong, but confidence faded after numerous stories of online hackers stealing millions of bitcoins from accounts. Also possible government intervention due to many bad actors using the currency for money laundering.
One of the most important disclaimers you will see in a mutual fund’s prospectus(information and disclosure document to prospective investors) is “past performance is not indicative of future results”. One common mistake investors make is come January they look at a report of the past year’s returns for a group of different funds. What seems sensible is to pick the best performers and buy them thinking they will be the winners this year as well. Again, the herd mentality is kicking in and that investor is not asking themselves if that investment is really ideal for their situation and goals.
Nobody likes a person who only sees the negatives, but it can be healthy to take a step back and be a skeptic of trends that seem out of sorts. I urge you to ask the hard questions, or better yet reach out to a financial advisor like me to get their professional advice! Be well and be safe.