The Emotions of Investing
When people think about investing, they often picture numbers, charts, and financial reports. But in reality, one of the biggest influences on investment success isn’t just the markets themselves it’s our emotions.
Fear, greed, excitement, and panic are all very normal human responses, but they can also lead us to make choices that don’t align with our long-term goals. Understanding how emotions impact investing is the first step to staying calm and making better decisions, even in uncertain times.
In this blog, we’ll explore how emotions and investing go hand in hand, common psychological traps that investors fall into, and strategies to balance emotions with rational thinking. We’ll also look at the important role a financial advisor plays in guiding clients through the highs and lows of the market.
Why Emotions and Investing Go Hand in Hand
Money isn’t just about numbers it’s tied to our sense of security, our plans for the future, and our hard work. So when we invest, emotions naturally become part of the process.
When markets are rising, many people feel optimistic and confident. When they fall, those same people may feel anxious or even desperate. These emotional reactions are completely normal, but if left unchecked, they can lead to short-term decisions that damage long-term outcomes.
The key is not to eliminate emotions, that’s impossible. Instead, it’s about recognising them and having strategies in place so emotions don’t take the driver’s seat in our investment decisions.
Common Emotional Traps in Investing
1. Overconfidence
When markets are going well, it’s easy to believe that we have a special ability to pick the right investments or time the market perfectly. This sense of overconfidence can lead to taking on more risk than we realise or purchasing investments without fully understanding them.
Overconfidence can be particularly dangerous because it blinds us to risks. It can also make us believe that the good times will last forever which history shows is not the case.
2. Loss Aversion
Psychological studies show that humans feel the pain of losses much more strongly than the pleasure of gains. This is known as loss aversion.
In investing, loss aversion can cause people to sell investments too quickly at the first sign of a downturn or avoid investing altogether out of fear of losing money. This behaviour often results in missing out on future growth when markets recover.
3. Chasing Past Performance
One of the most common mistakes investors make is assuming that what worked well in the past will continue to perform the same way in the future. For example, if a certain stock or sector has been booming, it’s tempting to jump on the bandwagon.
But past performance is not a guarantee of future returns. Chasing what has already gone up can lead to buying high and, unfortunately, selling low when the trend eventually reverses.
4. Trying to Time the Market
Many investors believe they can get ahead by perfectly predicting when to buy and sell. The problem? Timing the market consistently is nearly impossible.
Even professional fund managers struggle with it. Missing just a few of the best-performing days in the market can have a huge impact on long-term returns. Trying to time the market usually leads to stress, second-guessing, and often worse results than simply sticking with a disciplined plan and staying invested.
5. Failing to Rebalance
When markets rise and fall, the value of different investments in a portfolio changes. Over time, this can shift the balance of risk in ways investors don’t notice.
For example, after a strong run for shares, an investor’s portfolio may suddenly become much more growth-heavy than intended. Without rebalancing, they could be exposed to more risk than they’re comfortable with and not realise it until the next downturn.
The Emotional Rollercoaster of Market Cycles
Investing often feels like a rollercoaster. During periods of strong growth, many investors experience euphoria. Markets look unstoppable, and it’s tempting to throw caution aside and take on more risk.
But history shows that periods of euphoria are often followed by downturns. When markets fall, emotions like fear, regret, and even desperation can set in. Some investors panic and sell at the bottom, locking in losses. Others freeze and avoid making any decisions, missing out on recovery opportunities.
This cycle of excitement followed by fear is one of the biggest challenges of investing. Recognising that markets naturally move in cycles and preparing for both the highs and the lows is essential for long-term success.
Strategies for Balancing Emotions When Investing
While we can’t remove emotions from investing, there are ways to stop them from taking over:
Have a long-term plan – A clear investment strategy based on your goals can act as a roadmap, keeping you focused when emotions are high
Stay diversified – Spreading investments across different asset classes reduces the impact of market swings in one area
Avoid checking too often – Constantly watching markets go up and down fuels anxiety. Regular check-ins are important, but daily monitoring can do more harm than good
Rebalance regularly – Periodically adjusting your portfolio helps maintain your desired level of risk, even as markets move
Acknowledge your emotions – Simply recognising that you’re feeling fear, excitement, or panic can stop you from making impulsive decisions
The Role of a Financial Advisor in Managing Emotions
This is where working with a financial advisor makes a big difference. Investing isn’t just about picking the right shares or managed funds it’s about staying disciplined through good times and bad.
A financial advisor acts as a guide, helping clients stay on track and reducing the influence of short-term emotions. Here’s how:
Perspective during euphoria – When markets are booming and clients feel invincible, an advisor can bring a reality check, reminding them of long-term goals and the risks of overconfidence
Calm in downturns – When markets fall, emotions like fear and desperation often take over. A financial advisor provides reassurance, explaining that downturns are normal and helping clients avoid locking in losses unnecessarily by creating a strategy tailored specifically for you
Goal-focused decisions – Advisors bring the conversation back to the bigger picture: What are your goals? What’s your time frame? Does this decision support your overall strategy?
Reducing stress – Having a trusted professional to talk to can take a weight off clients’ shoulders. Instead of carrying the full burden of decision-making, they can lean on expert guidance and can help to understand what is happening in the markets and why
Accountability and discipline – Advisors help ensure that portfolios are rebalanced, risks are managed, and strategies are followed, even when emotions might push in the opposite direction
Good Markets vs. Bad Markets: How Advisors Guide Clients
In good markets: Clients may feel excited and want to take on more risk. Advisors help temper overconfidence and remind clients to stick with their plan rather than chase returns or sectors that may be overvalued
In bad markets: Clients may panic, sell at the wrong time, or stop investing altogether. Advisors provide perspective, explain the downturns, and help clients stay committed to their long-term strategy
This guidance is just as important as the financial strategy itself. In many ways, it’s about protecting clients from their own instincts and ensuring decisions are based on goals, not fear or excitement.
Why Understanding Emotions is Key to Investing Success
At its core, successful investing is as much about mindset as it is about money. Markets will generally go through cycles, but how we respond to them makes the difference between success and disappointment.
By recognising emotional traps like overconfidence, loss aversion, and chasing past performance, investors can avoid common mistakes. By sticking to strategies like diversification, rebalancing, and goal-focused investing, they can stay balanced through the highs and lows.
And by working with a financial advisor, investors gain not only financial expertise but also a calm, objective perspective that helps them stay on track no matter what the markets are doing.
About Us
After working as an advisor for a decade, Joel founded Unified Wealth.
Unified Wealth specialises in helping clients who are facing life’s big decisions.
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