The herd effect in investments

By herd effect in investments I mean trends, ideas and mass actions.

Investments are nothing more than a way to achieve financial goals. Goals differ from person to person, and so should your investments.

No one wants more money just for the sake of having money. Money itself has no value. It has the value of what we give it.

Maybe you want to have your own house, to support your children, to give them much more than you had or at least the same. Maybe you want to travel or maybe just to have the certainty that if something happens to your job tomorrow, you can support yourself and not at the level of water and bread, but at the level of going out and other such desires. Or maybe you want to have your own business, but to achieve it, you need money. The need for money comes from the financial goals that we all have. Maybe some are not aware of them yet.

 

The herd effect in investments and in life

The herd effect is a derivative of the instinct for preservation. It comes from animals and from antiquity, from the first people who, in order to be safe, join a herd/tribe. A single animal/individual, if attacked or simply in danger, will have much less power than a herd/tribe. In contrast, in a collective, the entire pack/tribe will act to protect the individual in danger.

 

This effect makes people want to be part of a community. Modern man will join communities with common interests, motivations and will exclude people with whom they have nothing in common. This community will act in the same direction and will “annihilate” every individual or information that contradicts the mutual rules of communion.

GREGÁR, -Ă, gregari, -e, adj (Fig.) Spirit (or instinct) gregar = spirit or instinct that urges some people to blindly obey, to completely lose their individuality in the midst of the crowd they are part of. source: DEX ’96 (1996) (dexonline)

 

The gregarious effect in setting financial goals in life

I have concluded that we all have goals. Maybe some of us have not yet realized them.

The gregarious effect or herd effect, as it is popularly known, determines the establishment of personal financial goals that all or most of us pursue. The herd effect, in its figurative form, also has negative effects in that it annihilates individuality with the personal force of rationalization. Such an effect generates the establishment of goals that may not be yours. You want your own house just because your parents said “get your own house, be on your own two feet”, you want a family because society says that “in life you have to plant a tree and have a child and build a house”.

 

Financial decisions in the herd

 Once you have established the financial goals of others, but not your own, you start looking for solutions and you also apply the solutions that come from others. Your decisions are induced by the decisions made by others.

When you buy a house, you decide to have more rooms because, no, the child will follow and you have where to go, because you have a high salary. This standard must be seen in the house you live in and in the level of the loan you have. And, since we want many things, big and cheap, you also take out a cheap loan, in another currency, because now it is the best solution. You “settle down in your house”, the child comes into the world and you end up doubling your expenses, your job “creaks”, and the loan expense presses because now the currency has increased, but your salary has not, because it is not directly related to that currency. You now turn to those who recommended these decisions to you and they tell you: “what to do, don’t you see that everyone is like this!”.

Other people’s goals, other people’s decisions and, therefore, other people’s lives. You live other people’s lives. You don’t feel comfortable, but at least, “that’s what everyone does!”. You hear about investments and find out that it’s the way to get rid of all this. Financial security is restored at work, the loan amount decreases, as does the exchange rate, the child has grown up and you can invest too. But what do you do, what do you choose to invest in?

 

Herding effect in investments

 Investments involve buying an asset at a price x – from that moment and selling it at a price y – price over time.

A profitable investment is one that, first of all, involves a salable asset in the future. Investment also requires selling the asset at a price higher than the purchase price. In conclusion, in addition to being salable, that asset must also be valuable; its value must increase over time, because an investment is made in the long term. This way we reduce the biggest problem in the area of ​​investments: risk. The risk is removed if the asset purchased now will be more expensive and if it will still be sought after.

The instinct of preservation comes and says that we should not subject ourselves to any risk, to stay in the safe, comfort zone. That’s why there are “tribes” that don’t invest and consider that it’s not worth it, that it’s too risky, that they don’t have money, that only those with a lot of money invest, that they are owned and the games are played by the powerful or in the shadows. And there are other “tribes” focused on a specific investment. However, individual situations are different.

How does the herding effect work in investments?

Those who own that asset notice that the asset is sought after and increase the price. Those who are in the position of buyers, buy up to a certain point: when the price is high enough to say: stop! At that moment, sellers start to lower the price. Buyers, seeing this effect, don’t throw their money at it to buy it until the price drops enough that a few buyers choose to take out their money and buy. Thus, the number of those who start buying also increases. What happens next? The cycle begins again.

The herding effect in investing involves following the decisions of the masses to determine what to do, namely: the other way around than the masses. When everyone chooses, on the capital market, to sell their assets because the price has dropped and the fear is “not to drop even more and not withdraw anything, at least withdraw something: a little but at least it’s something!”.

 

Why do we act on the basis of the herding effect?

We need energy. We need to conserve our energy. In a day we make a lot of decisions: from waking up and at what time, to getting dressed and with what, which vehicle to choose and the route, whether to eat or not to invest or save, for what and how much.

Our energy is limited and if we have used it on small decisions, in the case of big, important decisions in our lives such as planning financial goals and consulting the right financial vehicles, we end up resorting to the decisions of others, and these are not necessarily investment consultants, specialists in the fields in which we need them, but it is our mother or father, brother – sister, a cousin or a friend or the neighbor on the x floor. And they may act based on the decisions of others or may have a greater power of influence over you.

What to do? In the field of investments, ask what others have done and act accordingly. You will end up reacting differently and having different results; the results cannot be the same in most cases. Why? Because individual situations are different.

  Advice

I often hear this recommendation when a young person wants to invest: “first invest in yourself: buy books, courses, then invest!”. I don’t disagree completely, but partially. It is necessary for a young person, but not only to learn or know what investments entail, but if you read you will end up finding that you don’t know anything, that you still have a lot to learn and time passes. Time and money are very important in achieving important financial goals in life. Pay attention to the herd effect in investments; in any kind of investment you make!

One piece of advice, as I can give it, based on personal experience, is to start investing as young as possible. To invest money. To allocate a few discussions with an expert, with a few people who have invested, to analyze and act. Over time, one has the opportunity to learn. Specifically, in stages, I recommend “Steps to Financial Independence” – a short and comprehensive guide about the natural and complete steps in financial achievement. You can also download it for free from this site; you can find it at the bottom.https://www.psihologiabanilor.ro/

Success in becoming aware of money and your personal power to make decisions, take action, and achieve personal and financial success at the same time!

Sign: a young woman who wasted a few years before she got around to investing.