Fund Managers also follow herd instinct in a Stock Market Crash

October 19 of 1987, saw the Dow Jones Industrial Average dropped 22.6%. 20 years later, have the current players in the stock markets knew what to do in the event of another crash?

 

The herd instinct for most investors in the stock seemed to take hold on them as a result of fear. They exited the market, selling their investments in desperation at whatever prices.

 

It is interesting to note that “professional money managers fall prey to greed, fear and crowd behavior as much as amateurs. The Securities and Exchange Commission’s (SEC) post-crash study found that two thirds of trading came from institutional investors and investment houses.” (Newsweek, 15 October 2007, Lessons from the 1987 Crash)

 

The stock market movements whether rising or declining can be attributable to these institutional investors and investment houses that can move in substantial funds to buy stocks or withdraw them at the earliest opportunity during signs of trouble.

 

If you have faith in your stock based on the fundamentals of the company, you can hold on to your stock and ride over the storm. You can also be a contrarian, i.e. buy in when people are selling in desperation; sell when people are buying and chasing the stock. But this must be at a price that is right to you. What is a right price? For this, you have to do your own analysis.

 

Written on 10/16/2007 4:47 PM

 

Copyright © 2007, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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