Escape the herd mentality in the stock market

Published in the Small Business and Home Based Income Magazine, April 2008

Wealth Within chief analyst Dale Gillham has urged mum and dad investors to escape the herd mentality in the stock market and develop a written trading plan to achieve their financial goals.

“This ‘herd mentality’, or temptation to go with the crowd when it comes to popular stocks is an extremely common occurrence. 

But so often the popular stocks can be overpriced and when they disappoint it is easier to rationalise a stock that goes down because everyone else thought so highly of it,” said Mr Gillham.

“Commonly investors follow the herd to avoid the possibility of feeling remorse in the event that their decisions prove to be incorrect. 

Herding reduces the time required to properly analyse an investment decision because if everyone else is buying, someone else must have already done the required analysis. 

People seek comfort knowing they are not alone in their decision making.”

Mr Gillham recommends a written plan that clearly outlines your intentions in order to stop following the herd and reacting to the emotions of fear and greed.

“When we know what we are aiming for we have a much higher chance of success,” he said.

“A written trading plan provides you with the roadmap you need to achieve your financial goals so you hit the target every time. 

It helps you identify why you are investing and what you want to accomplish. 

It also provides the basis for your decisions and the actions you need to take when making a profit or loss.”

Mr Gillham said an example of a sound trading plan might apply to investment strategy.

“Your preference may be to invest in shares over the long term and only buy investments that produce capital growth and income from dividends that are fully franked. 

A trading plan sets out these important elements for consideration and to confirm your choice you would analyse both the fundamentals of the company and look at the stock chart to determine whether it is trending up to maximise your chances of success.”

To learn how you can gain the required knowledge and skill to ensure your success in the share market click here.

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