Last Updated on March 20, 2025
Overview – Go With the Flow or Go Your Own Way?
It has long been understood that humans are, collectively, a social species. Despite the “introvert” or “extrovert” categorizations that people love to assign, biologically speaking, we are predisposed to create social connections. After all, humans of antiquity probably realized that the best way to survive was to stick with others.
Because of our ingrained social nature, it’s no surprise that many of us are inclined to want to “fit in”. Most of us are probably uncomfortable with the idea of being ostracized by a group of people or society at large.
Despite these biological inclinations, as investors, it’s important to understand that sticking with the crowd no matter what may not always be in their best interests. Depending on what other investors are doing, there are times when it will make sense to follow what others are doing and times when it will be more prudent to distance themselves from the investment crowd.
Who, or What, Exactly Is the “Investment Crowd”?
After briefly alluding to it, who, or what, is the so-called “investment crowd”? It’s essential to clear this up before proceeding with our discussion.
The “investment crowd” isn’t a tangible entity that can be physically seen or felt. Rather, it’s best to think of it as a concept that represents the aggregate emotions, thoughts, and sentiments of different investors worldwide.
A similar idea is the so-called “court of public opinion“, which refers to the public’s overall perceptions, opinions, and stances on high-profile or well-known events or legal proceedings, especially ongoing ones. This “court” doesn’t gather in a physical location, yet it can communicate its thoughts through news outlets, social media, radio shows, videos, newspaper columns, and various other means.
Sometimes, this “court” can greatly influence the general populace’s views about certain legal proceedings or high-profile events, for better or for worse.
Similarly, although the investment crowd doesn’t physically convene, its numerous constituents can make their voices heard through the same channels utilized by the court of public opinion. As such, the investment crowd is hard to entirely ignore, and careless investors may find themselves swayed by what others have to say whether these various opinions are justifiable or not.
Pay Attention to the Investment Crowd, but Don’t Look Too Closely
Information is the lifeblood of everything investors do, and as such its importance cannot be overstated. To reinforce this point, we’ve previously discussed the different sources of information investors can avail of, and looked at how an investor’s analysis is only as good as the information they have to work with.
Because of this, one of the worst things an investor can do is isolate themselves from the rest of the world, thereby cutting off the information they need to effectively operate.
Like it or not, investors cannot afford to completely ignore the investment crowd. It’s easy to dismiss most of what the investment crowd does as mere noise, and while this may be true in many cases, applying such a blanket generalization is a dangerously naive thing to do. There will be times when the “antics” of other investors may, in fact, be justifiable, or may even end up leading to new, crucial information that otherwise may have been missed or overlooked.
Whenever any sort of crowd starts to get unruly, one of the first things most people do is try to figure out why, and if their reaction is warranted. Trying to figure out what other investors are up to is no different.
While paying attention to the investment crowd is important, individual investors must draw a line in the sand to demarcate “Observing what other investors are currently doing and what their thoughts are” versus “Getting too entangled with other investors’ emotions and irrationality”.
Therefore, keeping an eye on the investment crowd is a delicate balancing act of trying to discern any sort of useful information or insights while simultaneously keeping them far enough to avoid succumbing to herd mentality.
With that being said, when should investors know to distance themselves from the crowd or when it’s time to closely monitor, or even follow, what they’re doing?
Distancing Yourself From the Investment Crowd
It doesn’t take much observation to see that the investment crowd is a notoriously very emotional entity.
Investors around the world are constantly starved of good news, and can never seem to get enough of it. Conversely, all it usually takes to sink investor confidence is for some bad news to show up, or worse, for it to have lasting effects.
Because of this, the investment crowd has a nasty tendency to overreact to any new information, both good and bad, in the short term. The short term is an essential condition here because as time passes, investors can properly digest the information they’ve received, allowing them to calm down and for some semblance of rational decision-making to return. However, there’s no saying when that will happen.
History is rife with examples of the investment crowd overreacting to certain developments as they unfold; our Investment Lessons articles have no shortage of past instances that demonstrate this.
So, anytime some major news makes headlines, whether it’s investment, financial, economic, or politically related, it would be wise to keep some distance from the investment crowd to avoid getting caught in their overly emotional responses.
A common example of when to keep your distance from the investment crowd is whenever financial markets sharply decline. Markets can decline at a moment’s notice for several possible reasons, and when they do many investors are quick to let their emotions get the best of them.
At the onset of these events, it’s uncommon for investors to need to take immediate action, and are usually better off distancing themselves from the crowd and letting the mayhem subside before deciding if any action is necessary.
When Is the “Right” Time to Follow the Investment Crowd?
Other than trying to stay informed of current investment/political affairs, many investors understand that much of the news they routinely come across doesn’t impact their portfolios, goals, and strategies in any meaningful way. An investor with a predominantly Asian-focused portfolio probably doesn’t care that much about the day-to-day dealings of the US financial markets.
However, there will certainly be times when developments arise that directly affect or can greatly influence an investor’s activities. When this happens, investors will want to pay attention to how the investment crowd, specifically those who are similarly affected, will respond. Additionally, keeping up with the investment crowd under these circumstances may lead to important bits of information that may be difficult for individual investors to find on their own.
For example, imagine that new legislation was recently passed that severely impacts the renewable energy industry, an industry in which you have a few, sizeable holdings. Unsure of how this will all unfold in the future, you turn to the portion of the investment crowd who are also impacted by this development.
Some members of the crowd may suggest not taking any immediate action, while others may see this development as a red flag for the industry and as such warrant possible divestment from it. Certain comments on social media may even lead to new information that is hard to find through conventional means.
Keeping an eye on what other, similarly affected investors are doing and listening to what they have to say may help guide an individual investor’s next move.
While following the investment crowd under these circumstances may be beneficial, it’s important to view what they say or do as potential sources of inspiration, and nothing more. Ultimately, the agency to make any kind of move rests on the individual investor, not a faceless crowd.
It’s entirely possible for the actions they take to be emotionally or irrationally driven. Remember, maintaining a healthy dose of skepticism is sometimes an investor’s best defense.
Wrapping Up
Although the investment crowd is an intangible, amorphous entity, its presence and influence can be felt almost anywhere. So, the big question is how much attention should individual investors give to this “crowd”?
Because the investment crowd represents a potential source of information, completely disregarding what it says or does is a foolish thing to do. That being said, it’s important to maintain enough space from the investment crowd lest investors get caught up in a possible herd mentality.
At times it makes sense to stay far away from the investment crowd, while other instances may warrant paying closer attention to it. It all depends on what the current circumstances are and an individual investor’s judgment.
