“We cannot reason ourselves out of our basic irrationality. All we can do is learn the art of being irrational in a reasonable way.” (Aldous Huxley).
The madness of crowds
None of us are rational investors. We’re humans – fuelled by fear, overconfidence, and sometimes greed – to survive. Psychologists have long argued that we allow ourselves to be influenced by the "madness of crowds”. Mob mentality, herd mentality, groupthink – the concept has many names. But they all boil down to the same idea: Individuals are influenced by a larger group. So, if tech stock is on the rise, FOMO kicks in, and we all invest more in tech. Bubbles pop Most of us would like to be invested in the top-performing investments year after year, and we may chase performance by continually shifting our portfolios toward what’s hot. A common problem with this kind of performance chasing is that the hot stock cools off! It’s not just speculative assets like cryptocurrencies or meme stocks that can be prone to bubbles. When a new technology or product that has the potential to reach a vast new market is introduced, we tend to bet on many of the companies that provide the technology or product as if they will each become the leading player in that market. This can result in the entire industry being overvalued … until reality comes into play, and the bubble pops. In 1636, the Tulip Mania bubble burst when investors in Holland began frantically buying up tulip bulbs. The bulbs were a highly prized status symbol, and the prices of the desirable varieties went through the roof. At the height of the craze, each bulb cost more than a year’s salary for a skilled worker in Amsterdam. By 1637, things reached a head when the cheapest bulbs reached absurd prices. Demand collapsed, and values nosedived, leaving many investors in the doldrums. A similar thing happened with ostrich feathers in our own country – Oudtshoorn today is a shadow of its former self. We’re all far more familiar with the dot com bubble. The NASDAQ rose from 745 points at the beginning of 1995 to 5048 in March 2000. When the bubble finally burst in 2002, the NASDAQ saw 78% of its value wiped away. The value of tech-heavy S&P 500 was nearly halved, and the shockwaves were felt globally. Speculative investing can be exciting and rewarding, but it can also be dangerous and costly. That’s why you should be careful when approaching speculative investments and only allocate a small portion of your portfolio to them – and even then, only if you really can afford the risk. Watch out for the signs According to the authors Larry Swedroe and Ben Henry-Moreland, four main signs of prominent market delusions have been present in the various bubbles since the 1990s.
Though it may not be possible to time exactly when a big market bubble will burst, these signs make it highly likely that a correction will happen eventually.
There is such a thing as a free lunch
The obvious way to avoid getting caught up in prominent market delusions is by remaining broadly diversified across markets and investing sensibly.
Diversification ensures that some of your money will always be in the best-performing segment. Of course, some will also be in other segments, including those that aren’t so hot. While that may not be as exciting as loading up on the “latest and greatest,” diversification provides a less risky and more even-keeled way to grow your money over time.
The real beauty of diversification is that it produces superior long-term returns while smoothing out the volatility en route. This muting of sharp ups and downs is vital. It helps protect you from your most dangerous hindrance as an investor – your own emotions.
When you hear about a newbie investment opportunity and are urged to join the crowd, please come to us first. We want to do the research for you and assist you in deciding whether it’s hot or not.
Complete Your Financial Plan
Sign Up To Our Mailing List
November 4 - Market Update: Reasons for SA Investors to Be Hopeful?November 3 - Evolving Wealth Part 1: Gen Z, Trailblazers of the Digital Investment EraNovember 2 - Why the Rand Shouldn’t Be Your Main Reason for Investing OffshoreNovember 1 - 6 Winning Strategies That Top Investors and Elite Endurance Athletes ShareOctober 4 - Market Update | US Election Is Too Close To Call, so Expect Market VolatilityOctober 3 - How Rand-Cost Averaging Could Help YouOctober 2 - From Vows to Verdicts: What Happens to Your Will After Divorce?October 1 - With Gold at Record Highs, Should You be Investing?September 4 - Market Update: Christmas in September if Rates Come Down as ExpectedSeptember 3 - Why You Should Keep Your Investment Strategy to YourselfSeptember 2 - Aligning Your “Wheel of Life” – A Beginner’s GuideSeptember 1 - The Big Question: Should You Buy a Home or Rent One?August 4 - Market Update: Magnificent Seven Lose Their Magnificence in JulyAugust 3 - Unsung Heroes of Insurance: Four Types That Could Save You MoneyAugust 2 - Do You Recognise Yourself in Any of These Client Case Studies?August 1 - Three Pot System 101: What You Need to Know Before 1 SeptemberJuly 4 - Market Update: Financial Markets Welcome GNU 2.0 and New CabinetJuly 3 - Busting the Post-Retirement JargonJuly 2 - Safeguard Your Money: Look out for Phishing ScamsJuly 1 - Why the Marshmallow Effect Could Derail Your Retirement PlansJune 4 - Why Emotions and Investing Don’t Always MixJune 3 - Demystifying Retirement Planning LingoJune 2 - The Sandwich Generation: How Can You Deal with Family Always Asking You for Money?June 1 - How the Elections May Impact Markets in the Months AheadMay 4 - Market Update: Geopolitical and Economic Risks are on the Rise and Investors are ConcernedMay 3 - Need to Know: Annualised Returns Versus Internal Rates of ReturnMay 2 - Investment Jargon 101: Your One-Stop PrimerMay 1 - Do You and Your Partner Share the Same Money Values?April 4 - Market Update : Will They, Won’t They? The Case for Lower Interest Rates Improved in March.April 3 - Unpacking Diversification: What Really Counts?April 2 - Zen and the Art of Financial PlanningApril 1 - The Secret to Solving the Financial Rubik’s Cube? Consistency.March 4 - Market Update: Initial Investor Vote of Confidence Dissipates in Wake of BudgetMarch 3 - The Most Important Part of a Financial Plan: Room for ErrorMarch 2 - Diversification: Free Lunch or Fool’s Gold?March 1 - Budget 2024: What it means for youFebruary 5 - Budget 2024: The Minister of Finance Wants to Hear from You!February 4 - Market Update: US and SA Markets Diverge on Differing Investor SentimentFebruary 3 - Tax Tip: Must-Do Top Ups in FebruaryFebruary 2 - Should Investing Be This Sexy?February 1 - Is There Really Much Difference Between Investing and Gambling?January 4 - Market Update: What Lies Ahead for 2024?January 3 - Think You’re a Rational Investor? Think AgainJanuary 2 - Did 2017 Change the Way You Invest?January 1 - How to Avoid Getting Burnt by the Next Investment Bubble in 2024
December 4 - Stock Markets Break Three-Month Losing StreakDecember 3 - The Differences Between Life and Living AnnuitiesDecember 2 - Should you be an Optimist or a Pessimist With Your Money?December 1 - How to Give Meaningful Gifts This Festive SeasonNovember 4 - Market Update: The Effects of War, Higher Interest Rates and China on EquitiesNovember 3 - Why do People Invest in Property?November 2 - Retirement Planning: The ins and Outs of Nominating BeneficiariesNovember 1 - Retiring Well is About More Than MoneyOctober 4 - Why Your Marital Contract Really MattersOctober 3 - How to Avoid Being Scammed by Email FraudstersOctober 2 - The Stock Market Indices to Watch When Monitoring Equity PerformanceOctober 1 - Why do Some People Have a Problem Spending Money?September 4 - The Difference Between Being Rich and Being WealthySeptember 3 - The Ins and Outs of Buying Offshore PropertySeptember 2 - A Good Budget Doesn’t Limit Spending, it Prioritises itSeptember 1 - Should you pay off your home loan?August 4 - How to Take Advantage of the Donations Tax AllowanceAugust 3 - Five Reasons why a Financial Windfall Must be Managed CarefullyAugust 2 - What’s Cooking with the Three-Pot System?August 1 - Make Sure Your Family is Financially Prepared for When You Pass AwayJuly 4 - A Must-Have for Couples who Choose not to Tie the KnotJuly 3 - Can Gratitude Make you Feel Better About Your Money?July 2 - Four Ways to Make the Most of RetirementJuly 1 - How to Invest When There’s So Much Bad NewsJune 4 - The Ins and Outs of Compulsory AnnuitiesJune 3 - Who is Influencing Your Financial Decisions?June 2 - R is for RebalancingJune 1 - Don’t let Money Ruin Your RelationshipMay 4 - Five Ways to Teach Kids About MoneyMay 3 - Much Ado About RiskMay 2 - Living Wills: A Must Have, Despite the Grey AreasMay 1 - What is True Wealth?April 4 - How the 2023 Budget Will Impact Your PocketApril 3 - Three Financial Imperatives for Women in DivorceApril 2 - Should You Ask ChatGPT for Financial Advice?April 1 - Compound Interest: The Eighth Wonder of the WorldMarch 4 - How a ‘Safe’ Fixed Deposit Might Still be RiskyMarch 3 - Thinking of moving to Australia? Bear these numbers in mindMarch 2 - Avoid These 6 Barriers to Wealth CreationMarch 1 - How Good do You Think You Are at Investing?February 4 - Is Money Stress Taking a Toll on You?February 3 - Why an Endowment is One of the Best Ways to Invest OffshoreFebruary 2 - Why too Much of a Good Thing Can be a Bad ThingFebruary 1 - Invest With FIRE and Never Look BackJanuary 4 - Why Lottery Winners End up Broke: The Importance of Your Financial ContextJanuary 3 - Discover the Freedom of a Tidy PortfolioJanuary 2 - Why You Absolutely Should be Investing in EducationJanuary 1 - Four Simple Steps to Start the Year on the Right Financial Foot
December 4 - What is This Volatility Risk People are Always Talking About?December 3 - Why You Need to Watch Out for The Butterfly EffectDecember 2 - 6 Ways to Achieve Financial FreedomDecember 1 - Three Books for the HolidaysNovember 4 - The Question of LoyaltyNovember 3 - Why do we Even Have Bull and Bear Markets?November 2 - Should I Buy a Holiday House?November 1 - Put Stocks, Rather Than Socks, Under the Tree This ChristmasOctober 4 - Can You Take Out Life Insurance on Someone Else?October 3 - Loss Aversion and Lifestyle Creep – How Behaviour Influences SavingOctober 2 - Why Timing Might be Everything in Retirement – Especially in a Bear MarketOctober 1 - Get Rich - Stay Rich Eight Mistakes Wealthy People Never MakeSeptember 4 - Capital Gains Tax: 10 Common Questions AnsweredSeptember 3 - The Risk That Many Investors Don’t Think AboutSeptember 2 - Much Ado About Regulation 28 and the Private InvestorSeptember 1 - The “Two Bucket” Retirement Savings System: What is it and Why is it Important?August 4 - Retirement Planning for Age-Gap CouplesAugust 3 - A Simple “50-15-5” Budget Hack for Women (and Men!)August 2 - Does Your Family Need a Constitution?August 1 - Women’s Month: Three Ways You Can Improve Your Money HealthJuly 4 - Five Things to Check When a Loved One Passes AwayJuly 3 - Rules of Financial Planning For a Special-Needs ChildJuly 2 - Why Your Financial Plan Should Cater For Possible DementiaJuly 1 - Why Inflation is the Most Important Investment BenchmarkJune 4 - How Relevant Is The 4% Rule of Thumb These Days?June 3 - Why You Should Treat Your Finances Like Your HealthJune 2 - Is Your Business Good Retirement Capital?June 1 - With the Limits Raised, How Much Should You Invest Offshore?May 5 - Quote of the Month: Challenging the Rejection of an Insurance ClaimMay 4 - Financial Products: The Less You Understand, the More You PayMay 3 - The Miracle of Investment Debit OrdersMay 2 - Five Things to Think About as Interest Rates RiseMay 1 - Stay Calm When the Bear ProwlsApril 5 - Quotes of the Month – The War in UkraineApril 4 - Smart Ways to Give: During and After Your LifetimeApril 3 - Take These Three Steps to Break the Money Shame SpiralApril 2 - When Things Don’t Go According To (The Financial) PlanApril 1 - What Amazon and Ford Can Tell Us About DiversificationMarch 4 - Quotes of the month – What the NFT?March 3 - How to Avoid Losing Your Life’s Savings to a “Tinder Swindler”March 2 - The Different Ways to Invest: What Does It All Mean?March 1 - Three Reasons You Shouldn’t Wait to Talk to Your Kids About MoneyFebruary 6 - Quote of the Month – Don’t Cash In Your Retirement SavingsFebruary 5 - Should You Top Up Your Retirement Annuities Now?February 4 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial DistressFebruary 3 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial DistressFebruary 2 - Three Reasons an Insurer Could Cancel Your PolicyFebruary 1 - Investing: Men and Women See Things DifferentlyJanuary 4 - Quote of the month – Stay invested!January 3 - What SARS Says About Crypto Assets and TaxJanuary 2 - Three Ways to Leave a Legacy, And Not Just an EstateJanuary 1 - Red-Carding the Myth of The Rational Investor