Is Herd Behavior Affecting Your Financial Stability?
- Rolf Issler
- Jul 15, 2022
- 3 min read
Updated: Apr 10

We've all witnessed it, whether in nature documentaries or crowded shopping malls: the power of the herd. One wildebeest starts crossing the river, then a few more, and soon the entire group follows, often without a second thought.
This instinct to join the group, to do what we see everyone else doing, is deeply ingrained in us. But when it comes to our financial stability, blindly following the herd can be a dangerous stampede towards less-than-ideal outcomes.
It's natural to feel a sense of security in numbers, a fear of being wrong or missing out. This often manifests as panic buying during market booms and panic selling during downturns. History is littered with examples of this phenomenon creating market bubbles and subsequent crashes, from the dot-com bubble to the 2008 financial crisis and the initial shockwaves of the COVID-19 pandemic.
As Morningstar wisely noted, "It's natural to want to follow the crowd. But unfortunately, the crowd is usually running in the wrong direction."
Why Do We Instinctively Follow the Financial Crowd?
Several factors contribute to this powerful urge:
The Illusion of Safety in Numbers: When faced with complex financial decisions, our minds often seek shortcuts. Observing a large group acting in a certain way can create a false sense of security. If everyone else is buying a particular stock or selling their investments, it can feel like the "right" thing to do, even without a clear understanding of the underlying reasons. This is particularly true when we lack confidence in our own financial knowledge or strategy.
Navigating Uncertainty: We are currently living in a period of significant global change and uncertainty. The long-term economic impacts of the pandemic, geopolitical tensions, and shifting macroeconomic trends like the reversal of decades-long declining interest rates and low inflation can create anxiety, especially for those with less investment experience. In such times, the urge to seek the perceived safety of the crowd intensifies.
The Discomfort of Standing Alone: Going against the grain can feel emotionally draining and uncomfortable. Our inherent social instincts often push us towards conformity to avoid feeling left out or wrong. It requires conscious effort and a degree of emotional resilience to maintain a different course.
Cognitive Load and Decision Fatigue: Making rational and disciplined financial decisions requires attention and mental energy. In today's world, our attention is already stretched thin by concerns about the rising cost of living, global events, and daily responsibilities. It takes significant effort to override our emotional impulses and engage the logical side of our brains when it comes to our finances.
Breaking Free from the Herd Mentality
So, what practical steps can you take to avoid the pitfalls of herd behaviour and make sound financial decisions?
Resist the Urge to Panic: Market fluctuations are a normal part of the investment cycle. Avoid making impulsive decisions based on fear or the actions of the crowd. Stay disciplined and focused on your long-term financial plan.
Engage Your Logical Mind: Remind yourself that reacting emotionally to market noise often leads to buying high and selling low – the opposite of sound investment strategy. Look at historical data and remember that markets have historically recovered from downturns. Those who stayed the course during previous crises, like the 2008 global financial crisis, generally experienced positive returns in the subsequent years.
Seek Expert Guidance: This is where a trusted financial advisor plays a crucial role. An experienced professional can provide objective advice, help you stay grounded during volatile periods, and ensure your decisions align with your individual goals and risk tolerance. We are experienced in guiding clients through uncertain times and helping them avoid emotionally driven decisions.
Embrace Independent Thinking: Understand that market volatility can present opportunities. When others are selling, it can be a chance to buy quality assets at more favourable valuations. Current market conditions, for example, may offer valuations not seen since the beginning of the pandemic or the 2008 financial crisis.
Regularly Review and Adapt Your Plan: Setbacks and changing circumstances are inevitable. It’s essential to periodically review your financial plan to ensure it still aligns with your goals and adapt it as needed. If you don't have a written financial plan, now is the opportune time to start building one for future recovery.
We empower our clients to navigate the complexities of the financial landscape with confidence and clarity. We help you develop a personalized, values-based financial plan that acts as your compass, guiding you toward your goals regardless of which way the herd is running. Contact us today to learn how our proactive and integrated approach can help you build a lasting legacy independent of market fads and fleeting trends.
Comments