Why we're bad at investing part 7: We follow the crowd

“I don’t know how to be rich.”

I have heard many variations of this phrase over the years, often from people who have recently sold businesses, and who are overwhelmed by the prospect of managing significant liquid wealth, and all the responsibilities that come with it.

There is a belief that there are things that the newly wealthy are “supposed” to be doing, and so they often look to others to guide them. With the right guidance, this can be very helpful. But just as often, they just end up repeating the mistakes of their friends and associates.

This is why I often see people with the same advisors as their friends, or invested in the same funds, or in the same private companies.

Social proof is a powerful force. Many have built their wealth management businesses around it. Bernie Madoff used it to bring in the cash needed to keep his pyramid scheme operating.

But the influence of social proof can be insidious, creeping up on you where you may not expect it. Peer learning groups have been created to bring together wealthy investors, and while they have some benefits, they can also lead you down the wrong path. I cover this in my book Low Risk Rules. For now, be aware that others may not have it figured out as well as they appear to. Be careful following the guidance of non-experts when it comes to managing your wealth.