When Feelings Take the Wheel: Emotions and Investing
When we think about investing, we often think about numbers: returns, benchmarks, performance, and diversification. But investing is just as much about human behavior as it is about financial strategy. Our emotions, habits, and past experiences all have a powerful impact on the choices we make with our money. Sometimes they can steer us in the right direction (but oftentimes, it can be in the wrong direction).
Emotions vs. Logic
It’s human nature to react emotionally, especially when the stakes feel high. Fear, excitement, regret, even nostalgia can all drive impulsive decisions. Whether it’s the urge to sell after a market drop, the temptation to chase a hot stock, or the hesitation to let go of an investment that has been a part of your family for years, emotions can sometimes override logic.
Take fear, for example. When markets dip, many investors panic and sell, locking in losses instead of riding out the storm. On the flip side, excitement and the fear of missing out (FOMO) can drive investors to pour money into stocks that have already peaked. Both reactions can hurt long-term results.
Many investors find that their personal returns don’t always keep pace with the overall market. This gap often isn’t due to poor investment choices, but rather to the timing of decisions driven by emotion—like selling during downturns or chasing hot trends. Over time, these emotional moves can quietly erode long-term growth and make it harder to reach financial goals.
Interested in this topic?
We explored emotions and investing in a recent episode of our Real Talk Retirement podcast.
Where Emotions Come From
A big part of our financial behavior can be shaped by early experiences with money. Whether you grew up in a family that spent freely or one that pinched every penny, those formative years influence how you view financial risk, spending, and security today. And while it’s possible to evolve, many of those emotional habits stick with us for life.
Another common pitfall is overconfidence. It’s easy to believe a recent winning investment was due to skill rather than market momentum. But overestimating investment abilities can lead to concentrated risks and poor decision-making, especially if that confidence turns into complacency.
Taking the Emotion Out of Investing
While we can’t eliminate emotion entirely, we can put guardrails in place to avoid costly missteps. Here are a few strategies:
- Sleep on It: Big financial decisions deserve time. Let the emotion settle and revisit your options with a clear head.
- Write Down Your Goals: Clarity is calming. Define what you’re investing for – retirement, a legacy, peace of mind – and use that as your filter for decision-making.
- Avoid Frequent Account Checks: Watching daily market swings can stir anxiety. Instead, focus on long-term trends and trust your strategy.
- Diversify: Spread your investments out with strategy to avoid overexposure to any one stock, sector, or idea.
- Have someone you trust help: Having someone you trust in your corner is key. They bring objectivity. When your emotions are loud, a rational perspective can help you stay on track.
The market will always have ups and downs. What matters most is how you respond. Successful investing isn’t about being perfect. It’s about being consistent, patient, and mindful of the human tendencies that can derail a solid plan.