Herd instinct can be a detriment to investing success

On the one hand, one's own 'personal' approach to making an investment decision may suggest one course of action; on the other, the lure of the 'herd instinct' may be pulling entirely in the opposite direction. Even professionals can be swayed by popular opinion at times when ignoring the crowd would ultimately be more profitable.

Today, the instinct to listen to the group and follow the crowd is often useful. For example, you may choose a restaurant based on reviews , book a room at an inn after referencing feedback on TripAdvisor, or choose a plumber by following recommendations from Facebook friends.

This instinct to favor what is popular and well-liked among family, friends, and neighbors was crucial in the human race's early days. Common group knowledge supported survival. For example, if everyone drank from a certain body of water or ate a strange food and lived happily afterward, then the water or food was deemed safe to consume. Following the crowd simplified decision making, offering an easy and secure way to live.

Today, however, we may suffer harm when we apply such thought processes to investing decisions. That is, favoring what is popular or following the crowd may not be the best way to invest our money. Specifically, we often wrongly chase performance, buying shares of stocks, mutual funds, or other assets based on recent past performance and unloading them from our portfolio when everyone else is selling.

We need to retrain our instincts not to ignore the crowd altogether but to place a much greater weight to a disciplined investment approach.