“Animal instincts” is a phrase you may often hear to describe certain animal behaviours. For example, every year, the wildebeest migrates north to find better pastures for grazing.
Thousands of wildebeests travel great distances to find what they deem to be better feeding areas. The puzzle with this behaviour is that they really don’t need to migrate – they have plenty of vegetation to eat right where they are, but they migrate because it’s their instinct to do so.
Humans also have instincts. Frequently you’ll hear a person say they made a decision based on a “gut feeling”. The wildebeest’s instincts tell them to migrate for better food, which puts the herd at risk. Just like the wildebeest, a human’s gut instinct can lead them in a direction that can have negative consequences, especially when it comes to investing.
Investing is a game of chance when taking risks. You may see stable returns in your investment accounts, only to get an instinct or feeling that if you start taking more risks, you’ll end up with a higher return. While sometimes risks do work out, other times a person’s instincts can cause great financial losses.
One of the reasons investors tend to take risks is due to media coverage. On a daily basis, the media reports on market conditions, which may cause worry and tension among investors, therefore leading to risks that they may not otherwise take. When the worry and fear takes over, instinct kicks in and the investor becomes focuses on gaining the biggest return possible without assessing the risks they are taking. In a similar situation, an investor may know another investor or a friend who took a risk and it worked out, therefore prompting them to feel safe doing the same. But if you think back to the wildebeest, some of them make it to their destination, while others don’t. Using this analogy, it’s easy to see why sometimes it’s not the best idea to follow the pack.
Another issue with instincts and investing is that people often stick with things they are familiar. For example, you may decide to only invest in brands that you know well, as again this brings you a sense of security and safety, when really, the risks are not being thoroughly evaluated.
Experience also matters. With the wildebeest, those who don’t make it or get injured suffered their fate due to not having enough experience crossing the river. Rather than fight, they just give up and get swept away. With investing, one bad investment can lead to a person to literally freeze and be scared to invest again due to one bad decision.
In conclusion, with investing, some things are going to be out of your control. However, remember to follow the best practices and think through your decisions thoroughly before letting instincts take over.