Herd mentality is a very common investing psychology that shows itself in every move that people make on the stock market based on what other investors are doing. For investors to build wealth over time in India, avoiding herd behavior is crucial. Here in this article, we go over 5 actionable investment strategies for avoiding herd mentality.

Are you concerned about the market? Did you sell your stocks and avoid investing when the market started falling? Did you miss out on the recent bull run? Yes, market volatility can be scary, but for long-term investors there’s no need to panic. Stay smart and don’t fall prey to herd mentality.

What Is Herd Mentality?

The phrase “herd mentality” refers to a group of sheep that are travelling together when one of them jumps, and the others start jumping without even realizing it. Many investors make the same mistake over and over by following what the majority of people, friends, news sources, or other resources are saying or doing. This little phenomenon is called “Herd Mentality”. This is also known as peer pressure, mob behavior, or cluster mentality.

In the sheep scenario, if the second sheep questions why the first one is jumping instead of jumping, he can choose whether or not to jump. Herd behavior is a phenomenon in which people act based on what others are doing rather than on logic. Do not take unnecessary investing decisions without first determining whether following the crowd is beneficial or not.

“Investing in the stock market requires discipline, research, and a willingness to go against the herd.”

-StockMarketDaddy

Here are a few examples of herd behavior in the stock market from day-to-day market scenario.

The power of strong social belief

In general, people believe that the larger the group of people involved in any decision, the less chance there is that the decision will be incorrect. Again, it is a basic human tendency that makes people fearful of standing out from the crowd.

People are driven to adopt the group’s beliefs, behaviours, and emotions by a strong psychological force. For instance, a certain stock’s market price increases. If a friend advises you to buy the stock, you might think that you are falling behind and need to catch up. The herd mentality makes us feel like we’re missing out on a profit if we don’t buy. Until and unless anyone has little experience and expertise in the domain, he or she avoids directly opposing the masses.

Market conditions that can trigger herd mentality in stock market

Certain market conditions are likely to trigger the herd mentality. First, if the overall market is performing well, people are more likely to follow the crowd. This can be harmful, as some of the stocks on the market may not be good investments. When the market is down, people often avoid stocks, fearing that they’ll lose money. This is a good time to buy because there are usually great deals to be found.

Don’t pay too much attention to the media

The media is designed to generate clicks and views, which means sensational headlines designed to scare investors. If the market is up, the media loves to talk about how great the market is. But when the market is down, they love to talk about how horrible the market is. The market is a long-term game, so don’t let short-term price fluctuations get you too worked up. Don’t base your investment decisions on what you see in the media. Instead, focus on the long-term goals you want to achieve.

Don’t buy/sell based on emotions

If you are investing in the stock market for the long term, you should be calm and rational. It’s human nature to want what you can’t have. If the stock price is too high, you may want to buy it. But it’s important not to get too greedy. Don’t fall prey to the herd. Find out what a stock is really worth. Don’t let your emotions or those of others dictate your investment decisions. Instead, be patient and let the stock come to you.

In simple words, following what everyone else does in the stock market results in poor returns on investment, and these are the few things you should keep in mind to avoid herd mentality while investing your hard-earned money.

In conclusion, avoiding herd mentality in the stock market requires discipline, research, and a long-term investment strategy. By doing your own analysis and diversifying your portfolio, you can reduce your risk and make more informed investment decisions. Remember to keep a level head and not get caught up in the hype, and to always consider the risks involved before making any investment.

Daddy’s tips on avoid herd mentality in stock market

• Blindly following the crowd never gives you good returns.
• Never take decision blindly based on news, why? When news coming? after an event has already occurred. So now it does not make sense to take action. So just update the news and avoid overreacting.
• Herd mentality is the major reason people hold losing stocks in hopes of recovering while selling profitable ones out of concern.
• Stay calm, be patient, and don’t let short-term price fluctuations get you too worked up.

“Following the crowd never makes you rich in the stock market; if it could, then everyone would be rich, which is not possible. So be the questioning sheep.”

-StockMarketDaddy