Why Following Market Trends Can Make You Lose Money

Why Following Market Trends Can Make You Lose Money

Some people treat market trends like any other kind of fashion. Just as many people dress in a certain style because it’s popular, some investors choose a particular type of investment or react in a particular way to the markets because “everybody’s doing it.”

But is that wise?

Don’t follow the crowd

Imagine taking this approach when playing a game of chess. Instead of thinking whether your strategy is of any real benefit to your particular situation and if it’s actually helping you win, you blindly follow a specific approach simply because you read about it on a couple of chess blogs. Without questioning it, how do you know if it’s a good strategy for you? In fact, when Susan Polgar and I wrote Rich As A King, she said a common problem she sees with amateur players is that they often memorize openings of world champions, but then get stuck because they don’t really know what to do once the board develops into the mid-game.

While a particular strategy may be popular because it really is effective, that doesn’t automatically mean that it’s right for you every time. You need to look at what’s happening on the chessboard, what your opponent is doing, and then determine which strategy can help you win in your specific situation. Blindly following a strategy just because it sometimes works or because it worked for someone else, without stopping to think about its actual effectiveness in your particular situation, can be a huge mistake.

As Ralph Charell wrote, “Avoid the crowd. Do your own thinking independently. Be the chess player, not the chess piece.”

You need to be proactive and think, rather than simply following the tide.

market trends

 

Think carefully about your investments

Unfortunately, some investors follow the crowd and make certain investment decisions just because “everyone is doing it.” They read about a particular company, or someone they know suggests a fund, and they buy this position without asking any questions.

They simply follow the trend. But, that’s not the right approach.

You should think independently. Remember: losing a game of chess is not going to cost you as much as a financial loss caused by a bad investment decision. This is all the more reason for taking a logical approach to your finances rather than “following the crowd.”

When making an investment decision, ask yourself: Is this idea right for you, given your goals, level of risk, and overall financial situation?

Consult with your financial advisor for an objective opinion that takes your interests into account. Don’t base your decision only on market trends and fashionable opinions. Think for yourself. Be proactive, create a financial plan, and don’t just react to market moves.

Did Ralph Charell’s quote, pictured above, inspire you? You will find it, and many other chess quotes, in the Rich As A King Poster Book. To get your free copy, click here.

Douglas Goldstein, co-author of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investingis an avid chess fan, international investment advisor and Certified Financial Planner (CFP®).

 

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