Sometimes what poses the biggest risk to achieving your long-term goals is your emotions. This is especially common during large fluctuations in the market but can also happen during ordinary market cycles.
The further the market goes up, the easier it is to believe it’s going to go up forever, which can lead to buying near the top of the market. On the other hand, the lower the market falls, the more fearful you may become of losing more money, which can lead to selling near the bottom of the market.
Following this pattern is called “herding”. When the market is high, it’s because many other people have already bought in – which is why buying in would be considered “following the herd”. When the market is low, it’s because many other people have already sold.
As you might have guessed from the title of this piece, “following the herd” often backfires over the long-term.
As you can see in this chart, doing what everyone else is doing (represented by the orange bar) produced significantly smaller average returns than going against the herd, or even the market average itself. That’s why it’s really important to make your decisions based on your plan and convictions, not on market trends.
In the words of the great investor Warren Buffet, “Be fearful when others are greedy, and greedy when others are fearful.” But also remember, time in the market almost always trumps timing of the market.
