There's one key problem with financial trends, and that's the word "trend." A trend is, by nature, something that lasts for a limited period of time. Financial trends tend to follow an ebb-and-flow pattern: periods of prosperity followed by periods of decline followed by periods of prosperity, and so on.

TUTORIAL: 20 Investments You Should Know

Sometimes that pattern is limited to particular segments of the market or the globe. But the pattern is fairly constant. Financial trends are created when "everybody" catches on to some great financial opportunity or move. But the masses are a bad indicator of smart money moves; once everybody has caught on to a great financial trend, the trend is already on its way down in the pattern. Hence, we get to experience trends coming to what seems like an abrupt end: the dotcom bubble and the housing bubble for example. (For related reading, see Why Housing Market Bubbles Pop.)

Most people aren't financially savvy. They may know a little about accounting or have a few thousand dollars in the stock market, but most of us aren't financial experts by any means. We gauge the worth of any financial investment by looking at it through a risk versus reward lens. If the reward is greater than the risk, we figure it's a good move.

However, that lens is clouded by the "everybody else is doing it" nature of trends. We automatically view a financial opportunity as less risky if we can see crowds of other people doing the same thing. We find safety in crowds, and our instincts tell us that we are safe if we follow the crowd. So we measure the risk as disproportionately lower when the opportunity (buying a house with no down payment!) is popular. (For related reading, see 6 Reasons To Avoid Private Mortgage Insurance.)

Obviously, we're all learning that the crowd doesn't know squat about good financial opportunities. Current financial trends include large companies downsizing, midsize companies cutting costs and small companies throwing up their metaphorical hands in despair. On an individual and family level, many of us are on a trend "wait it out until things get better."

The Bottom Line
It's not that you should go spend money you don't have just to avoid following a trend. Rather, use your own common sense. But common sense might take a look around. Common sense might see some great opportunities that the crowds aren't seeing, because they're all too busy recovering from the last trend.

Related Articles
  1. Professionals

    7 Tips for Year-End Financial Planning

    There is always a rush to get financial planning tasks done at year's end. Here are some tips to help ease the crunch.
  2. Professionals

    How to Help Worried Clients See the Big Picture

    Advisors can have a tough time selling clients on the bigger picture, especially when the market is volatile. Here's how to manage expectations.
  3. Professionals

    Illiquid Real Estate: Correlation Pros and Cons

    Stock and bond markets are moving more closely in tandem with each other. Is illiquid real estate the vaccine for this correlation?
  4. Professionals

    How Legacy Planning Can Help Capture New Clients

    Don’t underestimate the importance of legacy planning with your clients—it could serve as method for you to create new business with any heirs.
  5. Taxes

    The Top 10 Caribbean Tax Havens

    Discover relevant tax policy information about the top 10 tax havens located in the Caribbean, including the Cayman Islands and the Bahamas.
  6. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  7. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  8. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  9. Professionals

    How to Get Free Social Security Spousal Benefits

    Married couples should thoroughly examine whether they are eligible to collect free spousal benefits on their Social Security income.
  10. Professionals

    How to Create a Retirement Co-Op in Your Community

    As the retirement boom continues, retirement co-ops are growing in popularity. Here's how to set one up in your community.
  1. Do financial advisors get paid by mutual funds?

    Financial advisors are reimbursed by mutual funds in exchange for the investment and financial advice they provide. A financial ... Read Full Answer >>
  2. Do financial advisors prepare tax returns for clients?

    Financial advisors engage in a wide variety of financial areas, including tax return preparation and tax planning for their ... Read Full Answer >>
  3. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  4. What fees do financial advisors charge?

    Financial advisors who operate as fee-only planners charge a percentage, usually 1 to 2%, of a client's net assets. For a ... Read Full Answer >>
  5. Under what circumstances would I benefit from a high net worth insurance policy?

    A high-net-worth insurance policy is specifically tailored to suit the needs of high-net-worth individuals. It is specifically ... Read Full Answer >>
  6. When is litigation better than mediation in a high net worth divorce case?

    Typically, litigation is better than mediation in high-net-worth divorce cases for two major situations – when there are ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!