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Herd Mentality and Its Consequences

Mark Twain once remarked, “It’s not what you don’t know that will hurt you. It’s what you think you know that isn’t so.”

This underscores a critical aspect of human behavior: the illusion of unique knowledge. Scientific studies reveal that approximately 75% of people exhibit herd behavior, often following the crowd rather than making independent decisions.


Historically, early humans followed the crowd as a survival mechanism, imitating behaviors that sustained life. Today, this manifests in the way large groups mimic social media influencers, adopting their fashion, behaviors, and lifestyle choices. For example, when a specific color, like grey, becomes trendy, people start incorporating it into their wardrobes and home decor. Popular clothing brands such as Nike, Adidas, and Zara also benefit from this herd behavior, with people gravitating towards these brands because they see others doing the same.

However, herd mentality can have detrimental effects, both historically and in modern times. Here are some significant examples:

Stock Market Crashes: The 1929 stock market crash, which led to the Great Depression, was fueled by herd behavior. As stock prices soared unsustainably, panic selling ensued when confidence waned, resulting in a market collapse. Similar patterns were seen during the Dot-com bubble of the late 1990s and the housing market crash of 2008 (Psychology Today) (Psychology Today).

Financial Planning: In the financial sector, herd mentality is evident in the widespread adoption of Modern Portfolio Theory, developed in 1952. This theory promotes diversification as a key to financial freedom. However, events like the 2008 market crash showed that diversification did not always protect investors. Firms like IPS Strategic Capital advocate for hedging instead of diversifying, comparing it to insuring homes rather than diversifying them​ (Psychology Today)​​ (Psychology Today)​.


Investment Comparisons: Consider a $100,000 investment over the last 23 years. A 60% stock and 40% bond diversified portfolio would have grown to $426,708. In contrast, the IPS Raw Structured Note, with 85% in the S&P 500 hedged, would have grown to $835,418, with zero downside risk. This stark difference highlights the potential shortcomings of following traditional diversification strategies.

Money Markets and CDs: Currently, around $6 trillion is held in money markets and CDs, offering about 5% returns. Many investors prefer this perceived low-risk option over the stock market. However, over the last 23 years, a $100,000 investment in a 5% CD would have grown to $307,152. In comparison, the IPS Raw Structured Index Treasury Note (ITN), the safest product we offer, would have grown to $835,418, with lower risk than money markets, which are only insured up to $250,000.

Retirement Concerns: The number one concern for retirees is outliving their savings. Those not leveraging high interest rates and market tools to secure their financial future are essentially following the herd and missing out on substantial opportunities.

In conclusion, while herd behavior has evolutionary roots and can simplify decision-making in complex environments, it can also lead to significant financial losses and missed opportunities. It’s crucial for investors to critically evaluate their strategies and consider alternative approaches rather than blindly following the herd.

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