When average herd investors see others buying or not buying certain assets, they tend to go along with the crowd. They are not aware that, in many cases, they are following charts or software which recommend trading only after aggressive buyers have already established their positions. Also when it comes time to sell the mass investor tends to finally close positions after the price has declined significantly. The only reason for this illogical behavior is that fear tends to be a much stronger emotion than euphoria, greed, complacency and anger.
Most average investors these days have become convinced that financial assets will remain permanently elevated with the Fed’s expansionary policy. Therefore they’re eager to put their money into anything other than safe time deposits. Once the illusion of safety and stability is shattered, with the realization that these assets were far riskier than initially perceived, it will create a deep disappointment among these investors. The fear and subsequent mass selling will cause far more severe declines than if these flock traders had realized in advance that they were taking dangerous risks. Ironically, whenever most investors think that it’s safe to buy, it is principally dangerous to do so, and vice versa. This is a good rule of thumb to remember in your trading.