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

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  2. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  3. Professionals

    Is it Time to (Finally) Push Kids Out of the Nest?

    Parents should make sure their kids realize their home is a launching pad not a landing spot, and advisors can help clients talk to their children.
  4. Professionals

    Top Questions to Ask When Choosing a Robo-Advisor

    Think a robo-advisor might be the right choice for you? Be sure to ask these questions first.
  5. Professionals

    Are Hedge Fund ETFs Suitable for Your Portfolio?

    Are hedge fund ETFs right for you? Here's what investors need to consider.
  6. Professionals

    Index or Target Dates in 401(k)s: Which is Better?

    A common question is whether or not plan participants should choose index or target date funds in a 401(k). The answer depends on different scenarios.
  7. Professionals

    How to Bring Up a Prenup with Clients

    Prenups aren't just for the rich. Here's how to help clients agree to one if you think they'll benefit.
  8. Professionals

    How to Avoid the Inheritance Nobody Wants: Debt

    With the biggest transfer of wealth underway, advisors need to ensure that clients don't also inherit debt.
  9. Professionals

    The Plusses of Second Opinions for Clients

    If you are not collaborating with other professionals in your circle, you could be doing your clients a disservice.
  10. Investing

    6 Reasons Why Every Investor Should Consider ETFs

    Once you understand the benefits of ETFs, you’ll see how they could be an exciting and smart way to help meet your financial goals. Here some key facts.
RELATED TERMS
  1. Financial Singularity

    A financial singularity is the point at which investment decisions ...
  2. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  3. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
  4. Anchoring and Adjustment

    Anchoring and adjustment is a cognitive error described by behavioral ...
  5. Robo-advisor (robo-adviser)

    Definition of Robo Financial Advisers
  6. Custodial Agreement

    An arrangement whereby one holds an asset or property on behalf ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What is the difference between fee-only advisors and fee-based advisors?

    “Fee-only” and “fee-based” sound similar, but there are important differences between these types of financial advisers. ... Read Full Answer >>
  4. Who are Morningstar's (MORN) main competitors?

    Morningstar, Inc. (MORN) is a leading provider of financial information via Internet, software and print-based products to ... Read Full Answer >>
  5. Who are Thomson-Reuters (TRI) main competitors?

    Thomson Reuters (TRI) is the worldwide market leader in financial data with a broad service range that includes publishing ... Read Full Answer >>
  6. How can you calculate your cash budget in Excel?

    Calculating a cash budget in Excel is best completed by dividing your budget into inflows and outflows. Excel makes it extremely ... Read Full Answer >>

You May Also Like

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!