It was William Shakespeare in Richard III who coined the phrase “Now is the winter of our discontent” that was “made glorious summer by this sun of York”. For reasons too well-documented to repeat, the discontent in the global economy is still awaiting “glorious summer”.

It is times like these, the period of 2000 to 2003 and the market falls seen in 2008 at the height of the financial crisis, that investors need to hold their nerve. Understanding the behaviour and psychology of investors is particularly poignant at times like this.

According to John Nofsinger, finance professor at Washington State University and author of Investment Madness: How Psychology Affects Your Investing... And What To Do About It, there were people who lost 50 per cent to 60 per cent of their investment wealth in 2000 because they refused to diversify and put too much money in tech stocks.

This “herd mentality” is one of the most glaringly obvious examples of irrational investing. The desire to do something just because everyone else is doing is far more often wrong than it is right.

The tendency to panic and depend on the direction of others can be exactly why problems arise in the stock market as often people are following the crowd into trouble rather than away from it.

Herd mentality results in two direct opposites. Panic buying – the “hot-tip” syndrome – occurs when people see a stock rising and they want to hop on for the ride. But in the rush to get in on the action inadequate research is often undertaken. If something is “hot” remember it will often burn your fingers. Thorough research is always necessary.

By contrast, panic selling – the “end of the world” syndrome – is when markets take a downturn and people react like it’s never happened before.

Symptoms include blaming, swearing and despairing. Regardless of losses people want to get out before the market completely wipes out your pension fund. Other areas Nofsinger discusses in his book are the overconfidence of many investors. “People feel that because there is so much information available that it leads to good decision-making,” he said. “The internet gives us quick access to information, but it doesn’t necessarily lead to knowledge unless you know how to use that information.”

We all tend to take more risks when we are comfortable, and fewer when we are not. The problem is that we tend to be comfortable when markets have been rising for a while and when we have been surrounded by good news.

We are uncomfortable when we have been through times of stress and chaos. Unfortunately this means we are likely to take on more risk when markets are high, and less when they are low. In fact, we would be better off to buy and hold.