Ralph and Betty recently bought a new Ford Explorer SUV for $40,000, after carefully researching before the purchase. Surprisingly, over the next few months, they began to receive offers to buy the vehicle from them at smaller and smaller amounts of money. As far as they knew the vehicle was still in great shape, it had a few thousand miles on it, a ding or two but apart from that the engine still purred and ran like it did when they bought it. Still, Ralph and Betty considered selling the Ford Explorer for half of what they paid for it because they worried that something might be wrong. Should they sell the vehicle?

Before you scoff at the insanity of the above example… ask yourself what your advice would be if it wasn’t a Ford Explorer they were considering selling at a loss, but 2,500 shares of Ford stock that started 2022 selling at $21.77 a share but now sells for $11.77 a share? If you are the typical investor you would advise Ralph and Betty to sell the Ford stock in a hurry.

I know this because I have 25+ years of experience and know that is what most investors do. They buy shares of stocks and mutual funds (for what they considered good reasons or because of advice from someone they trust), but they sell those shares when the market “turns against them”. Basically, they sell, sell, sell as soon as some total stranger starts offering to buy their investment for less than what they paid. Just like in our example, Ralph and Betty see nothing wrong with the Explorer and hope to keep it for 10 years but are wondering if they should sell it for one reason, the price offered is less than they paid. On Wall Street, this is called “investing with the herd”.

The belief that most people tend to conform (copy) the behavior of others (the herd) is an accepted principle of psychology.

Is this always bad, no. Actually, most conformity is a good thing, it is how we get along in a civilized society. If we didn’t all “conform” to an accepted standard of behavior when driving a car, then we could not drive a car. We all accept that when the light is RED in an intersection the “herd” of cars will STOP (all behave the same). The problem is when conformity is not in our best interest. Think about how you have counseled (lectured) your kids about their choice of friends not being in their best interest, or a daughter who is being told that the boy she is dating doesn’t have her same standards. In financial terms that translates into allowing the judgment of others (as reflected in market prices) to steer you into unwise investments or out of good investments (whose price may not currently reflect its true value).

The key to success is not following the herd… most successful investors seem to be a little odd. It’s because being disconnected from typical human reactions enables them to avoid the herd mentality.

As we have discussed in previous blogs, being fearful is normal. The future is a bit uncertain but if one studies history what we find is as a society we have a way of working through the uncertainty. That is the role of your financial advisor. When you are scared, ready to abandon your plan (follow the herd) because of fear it is your advisor’s job is to remind you that this has all been factored into your plan. They prepared you for “such a time as this”. If you are a DIY’er or you don’t have a plan or someone to talk with, and you are concerned, click on THIS LINK to schedule a call with us to talk.

Dave Conley, CFP