Herd behaviour

Adviser Insights by Elmarie da Silva

Most investors don’t make decisions in isolation. They are influenced, often unconsciously, by what others are doing. When markets rise and everyone seems to be making money, investing feels easier. Conversations become more positive, confidence increases, and the pressure to participate grows. But when markets fall, the opposite happens. Uncertainty rises, negative headlines dominate, and investors begin to question their decisions.

This pattern is not random. It is driven by a behavioral bias known as herd behaviour.

Herd behaviour is the tendency to follow the actions of a larger group, especially in uncertain situations. It is rooted in something very human, the need for comfort and reassurance. When others are making similar decisions, it reduces the feeling of risk. It creates a sense that the decision must be correct.

In everyday life, this instinct can be helpful. In investing, it often leads to poor outcomes.

Markets are forward-looking, but herd behavior is reactive. When prices rise, more investors are drawn in. As participation increases, prices can move even higher, reinforcing the belief that investing at that point is the right decision. But by the time a trend feels obvious, much of the opportunity has already passed. The same dynamic plays out in reverse. When markets decline, fear spreads quickly. Investors see others exiting, hear negative commentary, and begin to follow. This leads to a consistent and costly pattern:

Investors buy when assets are expensive and sell when they are undervalued.

For South African investors, herd behaviour is often intensified by the environment in which decisions are made. Local markets are influenced by a combination of global factors, domestic economic conditions, and currency movements. At the same time, media coverage and public sentiment tend to focus heavily on short-term developments, often amplifying both optimism and fear.

This creates strong emotional signals.

For example, when offshore markets perform well, there is often a surge in interest in global investing. Investors feel that they are missing out and rush to increase their exposure.

Similarly, during periods of local uncertainty or market decline, there is often a shift toward cash or “safer” assets, even when long-term opportunities are improving. In both cases, decisions are being driven by what others are doing, not by a structured plan.

The impact of herd behaviour is rarely obvious in a single decision. It becomes visible over time. An investor may increase exposure after a strong period of performance, only to experience a correction shortly thereafter. Later, after a period of poor performance, they may reduce exposure, missing the subsequent recovery. Individually, each decision feels reasonable. Collectively, they lead to a pattern of poor timing and reduced returns.

The cost of herd behaviour is not only reflected in market performance. In South Africa, it also has tax implications. Frequent switching between investments can trigger Capital Gains Tax, reducing the amount available for reinvestment. Over time, this tax drag compounds, further eroding returns. In addition, constantly adjusting a portfolio based on sentiment disrupts the underlying strategy. Compounding relies on time and consistency. When both are interrupted, long-term outcomes suffer.

The purpose of a well-structured investment strategy is not to react to market movements. It is to anticipate them. A properly constructed portfolio is built around diversification, long-term objectives, and an understanding that markets will move through cycles. It removes the need to follow trends and reduces the influence of short-term sentiment. Instead of asking, “What is everyone else doing?”, the focus shifts to a more important question: “What does my strategy require?”

That shift is where discipline replaces reaction.

The market does not reward consensus. It rewards discipline. Because by the time everyone agrees on
an investment… The opportunity is usually already gone.