Just when you thought you’d seen the last of flared trousers and tweed jackets, they’re once again starting to make an appearance.
Even the mullet – a fashion faux pas of the 1980s – has somehow managed to stage a miraculous comeback. Yet, it isn’t just fashion that’s a revolving wheel.
Vinyl records, which CDs, downloads, and streaming have long surpassed, sold more than 5.5 million units in the UK in 2022 alone, the highest total since 1990. According to This is Money, their popularity even played a role in keeping HMV afloat.
Then there’s the humble teapot. Having long been consigned to the past, it’s now enjoying a resurgence with Gen Z, with IFA Magazine reporting that 16- to 28-year-olds now rate a brew as their second-favourite drink, just behind water.
Sometimes it can feel nearly impossible to keep up with the ever-changing and cyclical nature of trends.
The same can be said for investing. It’s much easier than you may think to get swept away in the newest trend and invest your money in the “next big thing”.
However, doing so without the proper due diligence could put your hard-earned wealth at risk – continue reading to find out why.
Several cognitive biases might make you feel the urge to follow the crowd
It’s easy to understand why you feel the need to chase trends. Following the crowd has, in the past, helped humans survive and thrive in hostile environments, after all.
In investing, this is known as “herd mentality bias” – the tendency to copy the actions of others without conducting your own thorough research.
When everyone around you seems to be investing in a particular company or asset, it can sometimes feel reassuring to do the same.
However, just because something is popular doesn’t necessarily mean it is suitable for your own financial goals.
One of the fundamental aspects of investing is that past performance is no guarantee of future returns, and history supports this idea.
Indeed, data from Schroders reveals that, in 12 of the past 18 years, no top-performing US company remained in the top 10 the following year.
Even in the UK, for 11 of those 18 years, the average top 10 performer fell to the bottom half of performance distribution in the following year.
Of course, herd mentality isn’t the only cognitive bias that makes you chase trends.
“Confirmation bias” – where you look for information that supports what you already believe – can cause you to reaffirm your decision to invest in a new trend.
Moreover, “recency bias” can lead you to place too much importance on the latest performance data, assuming this will continue into the future.
You may find that social media can also amplify these biases. When you see financial influencers – known as “finfluencers” – discussing the successes of their investments, you might experience a “fear of missing out” (FOMO).
Yet, what works for someone else might not necessarily work for you, especially if your financial circumstances are different.
Chasing short-term trends could jeopardise your long-term financial security
It’s vital to remember that while a friend or family member might benefit from a particular asset or fund, this doesn’t mean it will suit your specific goals, investment time frame, and appetite for risk.
Investing based on hype may only expose you to unnecessary risk, and a notable example of this is the dot-com bubble.
During the 1990s, internet-based companies were performing well, and Investopedia states that the tech-heavy Nasdaq index increased from under 1,000 points to more than 5,000 between 1995 and 2000.
Many investors were quick to rush in, eager to get involved, their enthusiasm fuelled by hopes of continued returns.
However, the bubble eventually burst, and the Nasdaq fell by 76.81% from 2000 to 2002, resulting in many investors losing a considerable sum of money.
This shows that investing based on excitement or headlines might deliver short-term gains, but it often increases your exposure to risk and volatility.
You may want to ensure your portfolio is adequately diversified
Instead of chasing trends, a wiser approach might be to spread your investments across a range of sectors, asset classes, and geographical areas. This is known as “diversification”.
By avoiding placing all of your eggs in one basket, you could reduce your exposure to one single company or sector.
This means that if one part of your portfolio experiences a period of downturn, other areas might continue to grow, offsetting losses.
A diversified approach could also help you remain calm during periods of volatility. Instead of reacting emotionally to downturns, you may be able to stay focused on your long-term plan, trusting that your portfolio has been designed to weather volatility.
A financial planner could help you stay focused on your long-term goals
There’s a fair chance you didn’t expect the humble teapot to make such a meteoric comeback. Indeed, this kind of trend can be challenging to predict, and the same can be said about financial markets.
Trying to manage your investments alone can leave you vulnerable to emotional decision-making that often leads to trend chasing.
This is where the measured and informed perspective of a financial planner can be particularly helpful.
We could help you build a long-term plan that takes your priorities, tolerance for risk, and aspirations into account.
We can also ensure that your portfolio is adequately diversified and continue to monitor whether your investments remain aligned with your long-term goals.
Interestingly, research from Unbiased shows that professional financial advice can make people nearly £48,000 better off in pensions and financial assets.
Get in touch
If you’d like to find out more about how we can support you, please call 01992 500261 or fill in our online contact form to organise a meeting, and we’ll be in touch.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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