Avoiding emotional decisions

Emotional investing can carry steep costs. The urge to sell when your portfolio falls, or to buy when everyone around you is buying, can feel like the sensible thing to do in the moment. It is often emotion looking for relief.

You cannot switch off emotion. Markets move and you will feel something about it. The goal is not to feel nothing, but to decide in advance, while calm, so the feeling meets a plan rather than a blank page.

Why this matters

Watch your portfolio fall and notice what happens. The urge to act can be immediate. Selling can feel like doing something useful, like stopping the damage before it gets worse. That impulse is not irrational. It is human. But acting on it at the wrong moment can be costly.

The value of investments can fall as well as rise, and you may get back less than you invest. What that warning does not say is that much of the damage to a beginner’s returns can come from reacting badly to normal market moves. Selling in a fall is what realises a loss; whether that’s appropriate depends on several factors. Conversely, buying into a surge because everyone else is buying can stretch exposure at the top. Your own behaviour is the variable you can most directly control.

The idea in plain English

Emotional investing means letting fear, excitement or regret drive buy and sell decisions rather than a plan. The emotion itself is not the problem. The problem is when it overrides the reason you bought in the first place.

Two forms dominate. Panic selling is the first: offloading positions during a fall to stop the anxiety, often at a poor price. Fear of missing out is the second: buying into something because it has already risen sharply and everyone seems to be in. Both can feel sensible at the time.

You may not be able to eliminate the feeling, but you can build a gap between the feeling and your response to it.

The key points to understand

Loss aversion shapes more decisions than many investors realise. Some research suggests that a loss feels roughly twice as painful as an equivalent gain feels good. That asymmetry can push you to sell to stop the pain, even when holding would better match your longer-term plan. Loss aversion investing is not a flaw in character. It is a common human bias, and naming it can make it easier to spot.

Fear of missing out works in the opposite direction. A rising price, combined with crowd behaviour, can feel like proof that something is safe. In practice, it can also be a sign that expectations are already stretched and the asset has become expensive.

Overconfidence can follow a run of gains. A few good outcomes can feel like evidence of skill, prompting larger positions and less examination. When conditions change, that extra exposure can cause unnecessary pain.

Discipline is the counterweight. In an investing context, discipline means deciding your rules in advance so the emotional moment meets a framework, not an open question.

A simple example

Two investors hold the same global equity fund. The market falls 20% over several months. Both feel the same anxiety.

The first sells to stop the discomfort. The anxiety fades, but the loss is locked in. When the market later recovers, they buy back in at higher prices, turning a temporary fall into a swallowed cost.

The second investor had already decided, while calm, that they would hold unless their original reason for owning the fund changed. The price moved, but their reason did not. They do nothing. Staying invested in a falling market is uncomfortable, but doing nothing was the plan.

As the figure below shows, cash has a high probability of underperforming 60% equity/40% fixed oncome portfolio over the medium term, so selling during a downturn risks eating into potential future gains.

Sometimes the plan is to reduce risk (by rebalancing, stopping losses or moving to cash for near-term needs). The point is to follow a considered process, not to always hold.

Same fund, same conditions, different outcome. The variable was not the market. It was whether the decision was made in advance or in the moment.

How to use this in your next decision

Write down the reason you own each investment while you are calm. Not a price target or a hoped-for return. The thesis: why this holding makes sense for your situation and time horizon.

Before acting on a market move, ask one question: has the reason changed, or only the price? A price fall or rise on its own is not an explanation. The answer has to come from the original thesis.

If you are asking, ‘Should I sell my investments?’, treat that as a signal to slow down. Put in a pause between the impulse and the action, using a cooling-off protocol you set in advance. The point is to separate the moment of fear from the moment of decision.

A plan set in a calm moment is worth more than any decision made mid-fall. This is not advice to hold any specific position. It is a practical observation about decision quality: the version of you that decided while calm usually had a clearer view than the version reacting to a fast market move.

Consider getting regulated financial advice if you’re unsure.

Common mistakes

Selling in a fall to relieve anxiety, then buying back higher once it feels safe again: This is panic selling followed by late re-entry. The sale feels like control. The repurchase feels like resuming progress. The net effect is crystallising a loss and then paying more to return to the same exposure.

Buying into something because it has already risen sharply and the crowd is in: A rising price and positive sentiment can feel like evidence. They are often late information. Buying after a surge can mean taking risk at a higher valuation than you intended.

Checking a portfolio constantly: Each glance turns normal volatility into a decision point. The more often you look, the more often you have to resist acting. Reducing the frequency of checking reduces the number of chances to act on fear.

Treating a run of good outcomes as skill and taking on outsized exposure as a result: A few gains in a rising market do not prove you have a system. They prove you had exposure when conditions were favourable.

Key takeaways

• Emotion is normal and cannot be removed, but it can be kept out of the decision.

• Loss aversion and fear of missing out are two behaviours that can cost beginners the most.

• Decisions made in advance, while calm, beat decisions made in the moment.

• Ask whether the reason for holding has changed, not just whether the price has moved.

• Checking less and deciding by rule reduces the number of chances to act on fear.