Following the crowd isn’t always a good idea. For example, you’ve probably heard of the phrase “buy low and sell high.” In a nutshell, it means buying a stock when the price is low and likely to rise in value, and then sell when it’s reached its peak but before it starts to fall.
Unfortunately, many investors do the opposite—they “buy high and sell low.” They don’t do it on purpose, of course. They do it because they’re following the crowd. When it comes to your retirement, you have to time things properly and do them in moderation to keep your retirement savings happy and balanced.
Let’s take a fictional company as an example. Imagine that the ACME Corporation (of Looney Tunes™ fame) has just announced a new product to help wily coyotes catch incalcitrant road runners. This excites investors and analysts both, who promptly decide to buy the stock. The stock price rises. More investors jump in. The stock price rises faster. Suddenly you start hearing news stories about how ACME is a “must buy!” or that it’s “the hottest stock in decades!” Even your friends all talk about how many shares they’ve purchased. And since the stock just keeps going up, you decide it’s too great an opportunity to miss.
In reality, though, the opportunity is likely to have already passed. Suddenly, you’re buying stock at an absurdly high price. So much for buying low. Worse, you’re buying the stock not because you or your advisor did any research on the subject. You’re buying it because that’s what everyone else was doing, and you didn’t want to get left behind.
A few weeks go by. Maybe a few months. Then one day you turn on the TV and learn that ACME’s new roadrunner catcher doesn’t work nearly as well as people thought. In fact, at least one coyote has died—blown himself up, in fact.
Sell, sell, sell.
Since most investors now want nothing to do with the stock, you’ll likely have to sell your shares at a much lower price than you bought them for. And before you know it, you’ve lost money.
Some tips to avoid making this type of mistake include:
- If something sounds too good to be true, it probably is.
- Whenever an exciting investment idea comes to you, give yourself a few days before taking any action (if possible). Then, when you return to the idea, you can examine whether it still seems as promising as it did before.
- Write out a list of investing/financial rules for yourself, like a “Ten Commandments” list for your personal use. An example: I will never discuss my investments with my friends, nor listen to them discuss theirs.
- Always get a second opinion from an independent, unbiased financial professional before making a major financial decision.