Investors Are Emotional Creatures – But to Succeed, Reason Must Prevail

  • Despite having access to an unprecedented amount of market data, many private investors still make decisions based on emotions and impulses
  • Although the current market economy is strong, an overly emotional approach to investment will likely yield suboptimal results in the long-term
  • A well-defined investing strategy that combines data-driven active management with traditional wisdom is preferable to chasing short-term trends

Buy low, sell high. In the minds of many, this little four-word phrase is practically dogma – an immutable beacon guiding wayward investors long-term financial success.

But if that’s true, why does data show that during periods of market recession, investors begin to sell rapidly, compounding emerging dynamics and making the recession worse; or, similarly, investors buying in mass when the market shows signs of life?

The answer is simple: Emotion. Even in an age where data abounds and computers facilitate trades with cold, unfeeling rapidity, our emotions still play a major role in our investing decisions.

Plenty of people start investing with the intention of playing the long game. But when losses begin to accrue and the news portrays doom and gloom, it almost feels natural to dump assets and “minimize losses” rather than come face-to-face with more setbacks. Similarly, when the market sees explosive growth and thrill, excitement and optimism abounds, it’s extremely tempting to get on board and ride the green wave.

Unfortunately, financial success and emotional decision-making rarely go hand in hand. It’s undeniably true that investing hinges on probability, and sometimes, following the crowd can generate appreciable returns. But given that the sound advice of “buy low, sell high” runs counter to our emotional impulses, it’s usually better to develop a tailored financial plan and stick to it, through highs and lows.

Wide diversification and active portfolio management are sensible but emotionally counterintuitive. Diversification, after all, is more “boring” than betting big on promising assets, and active management is less comfortable than “set it and forget it.” Despite that, it’s imperative that investors seeking success across long timescales prioritize strategy and discipline over emotionally driven decisions, even if that discipline means short-term losses for long-term gains.

Research indicates that the more complex a choice is and the more uncertain the outcome, the higher the likelihood of a decision maker leaning on emotion instead of reason. In the world of investing, partnering with an external portfolio manager can prove immensely beneficial by creating an “emotional proxy” between you and your assets. Experienced portfolio managers that understand the impact emotion has on investing can help you both develop an appropriate strategy and see it through with confidence, championing your long-term cause through short-term setbacks.

Before you rush to take advantage of a strong economy, consider the whole journey, not just the destination, and prepare yourself to navigate the highs and lows that come with the territory. The future you will be glad you did.

Create a tailored investment strategy – and put the right tools in place to see it through. Reach out to Cypress Private Wealth to find a strategic partner that has the experience, knowledge and patience to help you reach your financial goals.


The opinions voiced in this material are for general information only are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

There is no guarantee that an investment strategy will yield positive outcomes. Investing involves risk, including loss principal. The advisors of Cypress Private Wealth are Registered Representatives with, and securities offered through LPL Financial, Member FINRNSIPC. Investment advice is offered through Strategic Wealth Advisors Group, LLC, a registered investment advisor. Strategic Wealth Advisors Group, LLC and Cypress Private Wealth are separate entities from LPL Financial.

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