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Avoiding the Bandwagon Effect

Posted by Michael Kane on Feb 10, 2017 4:21:01 PM
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AdobeStock_75941699.jpg"The 'bandwagon effect' is evident in almost every facet of modern life, but it’s especially notable in the way people spend and manage their money."

In 1848, entertainer Dan Rice used his bandwagon (literally a wagon that carried bands in parades) to campaign at political events. He encouraged rally attendees to “jump on the bandwagon” and support Zachary Taylor. Several politicians began to use the attention-grabbing tactic with much success. Over time, however, the “bandwagon effect” came to have a negative connotation, as it represented the psychological phenomenon of people doing something for the sole reason that other people are doing it, regardless of their own personal beliefs.

THE BANDWAGON EFFECT AND MONEY

The “bandwagon effect” is evident in almost every facet of modern life, but it’s especially notable in the way people spend and manage their money. For example, you probably know someone who buys the newest and best car or electronic gadgets, not because he or she really wants them, but to “keep up with the Joneses.” In the stock market, this mentality causes investors to go to cash in down markets because everyone else is, or to buy and sell certain stocks when the majority does. Others follow the crowd because they believe there is safety in numbers. They rationalize that if everyone is doing it, then it must be a good idea.

During the Dotcom bubble of the 1990s, many investors did just that. They were so intent on getting a piece of the technology boom that they began to invest in companies that had no track record of earnings or, in many cases, no viable business plan. These investors thought they were doing the right thing because, again, everyone was doing it. Unfortunately, as the Dotcom crash showed, the bandwagon effect can be devastating when applied to one’s financial and investment decisions.

THE BANDWAGON EFFECT AND YOUR FINANCIAL PLAN

It’s important to understand the potential consequences of this kind of behavior when it comes to your personal financial and retirement plan. Chasing returns or expecting your advisor to invest the way others’ advisors invest is a recipe for disaster. Unless they are independently wealthy (and sometimes even then), the people who spend a fortune to “keep up with the Joneses” risk not being able to save enough for a secure retirement. Investors who wait until a certain stock or fund is extremely popular are often too late to realize the gains of early adopters. Instead of buying low and selling high, they end up doing the opposite.

While it’s always a good idea to keep a finger on the pulse of the market and to know what other investors are doing, you must make decisions that take your personal circumstances into account. What works for someone else will not always work for you, and it may even be detrimental to your situation. Your investment decisions should be made based on research and fundamentals as opposed to popularity.

PARTNER WITH AN ADVISOR

So how can you avoid the bandwagon effect? It’s not as hard as you might think. Partnering with a trusted advisor can encourage you to stay the course on a plan that specifically addresses your individual goals and objectives. It can also help you avoid the harmful impulse to simply follow the crowd.

To find out which strategies could benefit you most or to begin the process of developing a financial plan tailored to your specific situation, request a call with an advisor at RAA.

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Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by RAA following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, RAA accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security. 

Topics: Financial Planning