Investor behaviour - good and bad

It may feel safer following the investment crowd but, in reality, following the herd is often highly detrimental for investors.

US financial planner and personal investment author Carl Richards writes in his latest New York Times column: "What feels safe is often risky, and what feels risky is often safe." 

As Richards, who is the author of The Behaviour Gap - Simple Ways to Stop Doing Dumb Things with Money, comments: "This statement contradicts just about every evolutionary instinct we possess." 

He defines the "behaviour gap" as the difference between what we should do and what we actually tend to do. 

While our distant ancestors were safer by sticking with the herd, the opposite tends to be true for investors. 

Herd-following investors typically buy shares when everyone else seems to be buying and prices are rising - only to typically sell when everyone else seems to be selling and prices are falling. In other words, they "sell low and buy high". 

Here are some strategies to avoid this fundamental investment pitfall:

• Set clear and appropriate investment goals.
• Develop a suitable long-term asset allocation for your portfolio, taking into account your goals, your tolerance to risk and the need to diversify your portfolio to spread the risks and opportunities.
• Stay committed to your appropriate long-term investment strategy through periods of market uncertainty and in spite of the actions of the market herd.

The shutting out of market "noise" can seem difficult - particularly when market emotions are particularly pessimistic or particularly optimistic. But keep in mind that there is a simple solution: Set suitable goals and stick with those goals if still appropriate.