The Economist published an interesting article this week about the foolishness of crowds when it comes to investing money.
The Buttonwood column, The foolishness of crowds, concludes that following the crowd during the course of normal events can be profitable. However, it can be entirely the wrong thing to do at other times.
Knowing whether to follow the crowd or avoid the herd is the difficulty.
The column contained research based on data from Morningstar, which found that the crowd was more often foolish than wise when it came to investing money.
On 60% of occasions, the returns from the most popular investment sectors were worse after investors bought funds in the sector than before. This highlights the problem associated with investing based on past performance.
There is a suggestion in the article that the popularity of fund sectors, and therefore crowd behaviour, could form the basis for a good contrarian investment strategy. Unfortunately, whilst unpopular funds did beat the most popular investment sectors, they tended to perform worse than average.
Here at Informed Choice, we believe that investment decisions should always be related to personal financial planning goals.
Whilst it is interesting to see how the corwds decide to invest their money each quarter, it is far more important to make investment decisions that are right for individual investors.
Photo credit: Flickr/Wayne Large
