Category Archives: Herd mentality

March Madness: Final Four Investing Bracket 2016

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March MadnessDear Mr. Market:

The entertainment and shock value you provide us with the stock market might meet its match over the next few weeks. Are you ready for some surprises and wild finishes? That’s what March Madness brings each and every year! It’s also an opportunity to take a high level view of the current investment environment with what lies ahead.

Six years ago we became the first Registered Investment Advisor to use the NCAA basketball tournament as a way to show our readers a forward-looking view on the stock market. We break down and assign each of the four “regions” with an asset class and then pick teams (companies) that we think have the best chance at doing well relative to others.

This year we will dive right into our investing bracket looks and how we think the remainder of 2016 will play out.

Click here to see the entire bracket.

To set the table let’s take a quick moment to recall last year and the undefeated Kentucky team. They came into the Final Four 38-0 and were a virtual lock to win it all but as you may remember the Wisconsin Badgers shocked everyone and provided the surprise millions of fans tune in for every year! This type of “upset” is exactly how we think 2016 will pan out in the Large Cap asset class.

Large Cap

Five years from now people will look back at 2015 as a year that the stock market extended its bull market run for one more year. Investors will exhibit a short-term memory lapse and forget that it actually was a very rough year with heightened volatility, the first correction, and a market that actually turned in negative numbers if you looked “under the hood”. The problem is…most people will not remember this and only look to see the S&P 500 finished positive +1.38%.

Without the “FANG” stock phenomena, however, 2015 would have been very negative. In other words, Continue reading →

5 ‘Investment Strategies’ Investors Must Avoid

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DMM 10-20-15Dear Mr. Market:

The markets continue to take investors on a bumpy ride with dramatic swings to the positive and negative.   Volatility has been here for the last several weeks and it is beginning to have an effect on investors and the decisions they make in regards to their portfolios. Investors are notorious for putting their portfolio on cruise control when the markets are doing well and then becoming hyper-sensitive when negative returns start appearing on their monthly statements.   With the first true market correction (-10% or more) in nearly four years, investors are considering a variety of options with their portfolios, many of them misleading and possibly disastrous. As fear and uncertainty build emotions begin to take control. There are many products and options that prey on investors in these environments…don’t allow yourself to fall for any of the five most common ones we discuss below…

Going to Cash – This is the classic move by investors when they simply can’t take it anymore; throwing their hands up in the air and admitting defeat by selling everything and going to cash. They justify it in their mind, feeling good about it; after all, jumping out and preserving what was left of their portfolio seems like the prudent thing to do. If this is you or you are considering this ‘strategy’ don’t start patting yourself on the back just yet! This could possibly be the worst move an investor could make unless they want to push back their retirement or drastically alter their financial goals. Consider this, every year for the last 35 years the markets have posted negative returns at some point during the year and 87% of the time the markets finished the year positive. Selling everything in your portfolio would be comparable to buying a new car and selling it as soon as you drive it off the lot because you realized that it went down 20% in value! Would you ever do that? We doubt it so don’t do this with your investments! Continue reading →

Understand the Herd…don’t follow it!

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Investor StampedeDear Mr. Market:

It is human nature to want to fit in or be part of the crowd. We all like to feel that we belong to a group and are not isolated. Take a moment and go back to your youth…everyone can remember a situation when someone asked us if we did something, “just because everyone else was doing it?” Another favorite that is asked of children and teens is, “would you jump off a cliff if everyone else was doing it?” Investors don’t often ask themselves these questions but as the markets have now crossed into negative territory and volatility is present they certainly should be before rushing into any decisions.

Behavioral Finance is a fascinating field and the better you understand it the better off you are as an investor. A central theme in behavioral finance is the “herd mentality”. Investopedia.com defines Herd Mentality as: “A mentality characterized by a lack of individual decision-making or thoughtfulness, causing people to think and act in the same way as the majority of those around them. In finance, a herd instinct would relate to instances in which individuals gravitate to the same or similar investments, based almost solely on the fact that many others are investing in those same stocks. The fear of regret of missing out on a good investment is often a driving force behind herd instinct.” Every individual has made a decision to fit in or be part of a group but should that include financial and investment decisions? We would answer that question with an absolute NO!  Continue reading →