Panic & herd investment behaviour

dont-panic
Share on linkedin
Share on facebook
Share on twitter
Share on email

8th March was the 42nd anniversary of Douglas Adam’s “Hitchhikers Guide to the Galaxy” radio premiere. So what has this got to do with behavioural finance and investor (human) behaviour?

As it turns out, quite a lot! Panic and herd behaviour is evident. An ‘increased use’ of loo paper isn’t a side effect of the coronavirus, so relative demand isn’t increased, and supply shouldn’t really be affected here. Then why is there a run on loo paper? Social media reinforces fake news, everyone else is doing it and the media is reporting on it. Because herding behaviour is so strong, if everyone else is panicking we feel we must too. And now the shelves are empty… “See I was right!”

The analogy is evident also with investment behaviour and markets. Share markets are LARGELY efficient MOST of the time. That means that valuations are USUALLY closely priced to their reasonable value as everyone has the same information available and they will RATIONALLY apply this. However, at times it can diverge from the rational. Sometimes people are too positive (This time it’s different!!) and they discount risks. And sometimes they panic and react to everyone else panicking instead of looking at the actual valuation.

Panicking and herding are behavioural characteristics that are extremely strong biases. We do need to acknowledge them and understand that the very real, emotional reaction is normal. But then we need to stand back, look at our overall strategy, consider our buffer for these “Black Swan” events that do happen and make decisions that are best for our long-term benefits.

A good strategy manages these normal risks by having a reasonable buffer and understand that in retirement, we need to manage the income and cash-flow.

Just make sure your retirement plan doesn’t end up in the toilet because we reacted to panic!

More insider tips

Stay up to date and in the know

Saige Financial Planning Pty Ltd and its advisers are Authorised Representatives of BD Financial Advisory Pty Ltd AFSL 502401 ABN 34 621 612 548. Please read our Financial Services Guide and consider our privacy policy. Any information on this website is general advice only and does not take into account any person’s objectives, financial situation or needs. Please consider your own circumstances and consider whether the advice is right for you before making a decision. Always obtain a Product Disclosure Document (if applicable) to understand the full implications and risks relating to the product and consider the Statement before making any decision about whether to acquire the financial product.

Liability limited by a scheme approved under Professional Standards Legislation.

Thank you for subscribing!

To confirm your email address, we have sent an email to you. You need to click the link in the email so we can complete your subscription.