We follow the crowd because we’re afraid of missing opportunities.

Follow me. And me. And me.

Herding is what happens when we follow the crowd—even when the crowd may be doing something kind of nutty. Like spending more for a tulip than they’d spend for a house. Find out why “but everyone else is doing it” may be a great reason to do something else.

This is the latest in Franklin Templeton’s series, “Behavioural Finance for Everyday Investors”, where we describe common investment barriers – so you can overcome them

The wisdom of crowds?

It’s hard to resist the lure of the crowd. But fear of missing out shouldn’t be a reason to abandon a sound investment plan. History has shown what happens when today’s trend becomes tomorrow’s bubble.

This chart shows some of the market’s most notorious bubbles. As they grew, investors bid up the prices of tulip bulbs, stocks and real estate to unsustainable levels, often within a very short time. What followed was devastating, especially for those who invested just before the bubbles burst.


The problem of going with the flow

Unfortunately, “just before the bubble bursts” is often exactly when people invest.

In the chart below, the blue peaks and valleys show fund flows over the past 20 years. This tells us when investors got into or out of the market. The orange line shows how the market performed over the same period.

Money poured into equity funds during the dot.com boom at the beginning of the century. Investors bought high. Later, during the Global Financial Crisis, money poured out of the markets. Investors sold low.

Buying high and selling low is never a recipe for long-term success.

S&P/TSX Composite Index Performance vs. Equity Funds

20-Year Period Ending December 31, 2018

These charts are for illustrative purposes only and do not reflect the performance of any Franklin Templeton fund.

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