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Don’t follow the herd: Asian markets will keep overperforming

33 0 6
09.11.2018

Watch stock markets patterns long enough and you pick up aspects of human psychology. The term “herding” is one example – the “herd instinct” mentality can cause people to gravitate towards the same or similar securities based almost solely on the fact that others are buying or selling them. Put another way, no one likes to be the first one on the dance floor.

That’s particularly relevant now, as beaten-down Asian markets may be prompting investors following the flow to sell down their holdings. Asian equities have lost more than 15 per cent in the year to date, and domestic Chinese equities have sunk by around 20 per cent – even counting their recent bounce back from even more depressed levels.

But in the face of a painful sell-off, breaking from the herd may be better for long-term financial health. The history of investing teaches that the price you pay when buying an asset tends to have a large impact on your returns. Time after time, when purchasing a stock trading below (sometimes significantly below) its long-term average price, you tend to get back an above-average long-term return. Starting valuations account for as much as 60 per cent of returns over a 10-year horizon.

The problem is that, as humans, it is inherently difficult to go against sentiment and buy an asset when it is cheap.

After the........

© South China Morning Post