..... ' or 'crowd' risk making wealth-destroying decisions.

Such investors typically gain comfort through buying shares when most other investors are buying and selling when most others are selling. In reality, herd-chasing investors tend to buy at the top of a market and sell at the bottom.

Investors who let themselves be pulled along by the investment crowd are really practising an emotionally-driven form of market-timing, trying to pick the best times to buy and sell. In practice, few professional investment managers, let alone personal investors, consistently succeed in timing the market.

Economist and investment strategist Shane Oliver warned in a recent newsletter that investors should be wary of crowds, particularly when a bull or bear market is developing. (He does not suggest that this is currently occurring).

Oliver writes: "Sometimes being one with a crowd is nice, for example, at rock concerts it adds to the ambience...

"However," he adds, "when crowds turn, they can be dangerous - you might get trampled! In fact, a wariness of crowds is essential to successful investing."

Oliver says it is well-known that investors suffer from lapses of logic such as assuming that whatever investment returns are prevailing at the time will continue. "When many investors make the same lapses of logic at the same time as part of a crowd, the result is magnified, he emphasises.

Many investors guard against any temptation to follow the investment herd by carefully constructing a strategic or long-term asset allocation for their portfolios - and then adhering to that asset allocation unless their circumstances change.

A portfolio's asset allocation - the proportions of its total assets that are invested in different asset classes of mainly local shares, international shares, fixed interest and cash - should reflect the degree of risk an investor is willing to take to achieve an expected return.

Significantly, this disciplined approach to investing should involve the regular rebalancing of a portfolio to ensure that it remains in line with the strategic asset allocation. (See Rational rebalancing , Smart Investing, January 10.)

Almost 30 years ago, a landmark investment research paper - Determinants of Portfolio Performance by Gary Brinson, Randolph Hood and Gilbert Beebower - concluded that asset allocation was by far the primary driver for a diversified portfolio's returns. This research is as relevant today as it was when first published.

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
20th February 2014