Investment Choices: Be Wary of Following the Herd
September 30, 2010The other day I was waiting for a flight to Seattle (great city by the way) and the person taking tickets said “Now boarding all those who will not be putting anything in the overhead bin.” I initially thought that this is a great way to seat people, speed up the process and have bin space available for others. As I watched the people progress through, I saw a lot of backpacks, purses etc. and then I saw it, a ROLLERBAG! And then I saw another, and another. Didn’t these people hear? I was appalled at the first person who skirted the system but amazed at all the others who followed suit. At long last the ticket agent finally said “Sir, we are only loading people with nothing to put in the overhead bin.”
Now what does that event have to do with financial education? Everything! One of the missteps that investors sometimes make is something called “following the hot dot” which translates to buy what’s going up because everyone else is. The problem with this is that often no homework is done on the underlying investment and the investor just buys because the investment will obviously continue to go up. And that always happens right? Not so much.
So does that mean we should never buy an investment when it is doing well and on an upswing? No. It means do your homework. Answer the basic questions; does it fit in your time frame? What is the potential upside/downside? Do you understand it? You get the idea.
Oh one last thing, much like the people who tried to circumvent the boarding process, taking shortcuts in investing does not payoff, eventually that person gets caught.