How to Prudently Invest With the Popular Money

One of the most important things that an investor can do when making investment decisions is sticking to that decision once it has been made. While this makes sense on the surface, the reality is that most of us are rarely able to stick to our guns in those months and years after we have made that investment decision. This can be evidenced by the amount of money that has been flowing in and out of certain asset classes on a monthly basis.

Of course, there are circumstances that warrant making changes. The first instance is when the investment itself has seen some fundamental changes that not only impact the investment itself but the portfolio as a whole. This could be a change in management, operation style and so on. The second is when the investment simply has not performed and/or it has changed in a way that puts it in a sector that has little or no prospect for recovery. A good example is General Motors, a company that once paid a decent dividend and was well-managed. Rather than watching the company file for bankruptcy and risk losing everything, it would have made sense to sell such a security once it was obvious that its fundamentals (it was bankrupt on paper before it came "public" with the bad news) and the industry as a whole had little prospect of turning that company's financial woes around anytime soon.

One of the most recent reports to come out has shown that investors are moving out of domestic growth equity investments and into bonds and emerging markets. Such shifts make sense if the idea is to chase "popular" money, regardless of returns. Because the bulk of a sector's returns will happen before they are reported, when the smart (not popular) money bought in. Look at Warren Buffet. He would never buy a company at its highs; he would rather buy it on sale. And right now, emerging markets and bonds are not on sale, so why should you buy them?

Again, this makes sense from a logical point. However, in reality we often cannot shake those urges. And when those urges to purchase higher risk investment just will not let up and we are faced with abandoning a good investment that is simply enduring a rough patch, we should come back to the following before pulling the trigger and following the popular money:

1. Asset mix. If our asset mix is out of balance, we can start by trimming your over-exposed holdings. Using some of the excess assets to invest in these "hotter" investments that we just cannot seem to get out of our head makes more sense that going "all in" by selling all of the old assets and investing it all in the new assets.

2. Limit exposure. By using the tactic above, we will limit our exposure considerably. When dropping a decent investment for a popular one, limiting exposure is essential. This means sticking to our core investments and expanding into these hot sectors the way we might ease into specialty asset class investments.

3. Monitor, monitor, monitor. Even if we invest in managed investment funds, we will need to keep a firm eye on our new investment to make sure it performs and behaves the way it should.

These are just three things we can do when moving with the "herd" and following the popular money into those hot investments that our logic tells us we should simply live without. With time and a bit of experience in seeing that such "hot" investments do not always add the value and returns we expect, it will become even easier to live without making those unnecessary switches.

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Chris has more than 17 years of financial services experience. He currently manages a website about Novaform Mattresses at NovaformMattressSale.com.