Avoiding Emotional Investment Decisions
Investing is often seen as a rational, numbers-driven exercise, but in reality, emotions play a significant role in decision-making. Fear, greed, overconfidence, and herd mentality can all lead to choices that undermine long-term returns. As advisers, we see firsthand how psychological biases can cause investors to deviate from their strategy—especially during periods of political or economic uncertainty.
This is where our role becomes valuable. A key part of our job is to provide an objective, third-party perspective, helping clients separate emotions from investment decisions. In times of market turbulence or political uncertainty, we act as a stabilising force, ensuring that short-term noise doesn’t derail long-term goals. Whether it’s avoiding panic selling, resisting the urge to chase the latest trend, or simply staying invested when fear takes over, having a trusted adviser can prevent costly mistakes.
Without a doubt, political events are among the biggest triggers for emotional decision-making. Elections, policy shifts, and geopolitical tensions often create heightened anxiety, leading investors to either make impulsive decisions or freeze altogether choosing to sit on the sidelines and do nothing. In both cases, emotions, rather than strategy, dictate the outcome. Our role is to guide clients through these moments, keeping their focus on what truly drives long-term investment success: discipline, fundamentals, and a well-structured plan.
The Impact of Emotions on Investment Decisions
Emotional biases can manifest in different ways, leading investors to make decisions that undermine their long-term success. Below are some of the most common psychological traps that influence investment behaviour and real-world examples of how they have played out in the markets.
Fear and Panic: Selling at the Worst Time
One of the most common emotional mistakes investors make is panic selling. When markets decline, fear takes over, and many investors sell their holdings to avoid further losses—often locking in losses that may have been temporary. This behaviour is known as "loss aversion," where the pain of losing money outweighs the potential joy of gains.
For example, during the COVID-19 market crash in early 2020, many investors exited the market in a panic, only to miss the sharp recovery that followed. Those who stayed the course benefited from one of the strongest bull markets in history.
Greed and Overconfidence: Chasing the Hottest Trend
On the flip side, greed and overconfidence can push investors to chase overhyped assets, leading to buying at market peaks. The dot-com bubble of the late 1990s is a classic example—investors poured money into tech stocks with little understanding of fundamentals, only to suffer when the bubble burst in 2000.
Similarly, meme stocks like GameStop and AMC in 2021 saw retail investors rush in due to FOMO (fear of missing out), often without a clear investment thesis. Those who got caught up in the euphoria and bought at the top suffered steep losses when prices inevitably corrected.
Herd Mentality: Following the Crowd Instead of Strategy
Investors often take cues from what others are doing rather than sticking to their investment strategy. This herd mentality can create bubbles or cause unnecessary sell-offs. Warren Buffett’s famous advice, “Be fearful when others are greedy and greedy when others are fearful,” speaks directly to this issue.
US Politics & S&P 500 Performance
One of the more topical conversations we’re having with clients right now is the second inauguration of Donald Trump. Political transitions—especially those as polarising as this—often spark concerns about how markets will react. Some investors fear that a president from the "wrong" party will trigger economic turmoil, while others believe a leadership change will fuel a market boom. However, history tells a different story: over the long run, markets have delivered strong returns regardless of who is in the White House.
The S&P 500 Compound Annual Growth Rate (CAGR) under different administrations highlights this trend. While short-term volatility is common under every presidency, the overall market trajectory has remained upward across both Democratic and Republican leadership. In fact, historical performance shows that neither party has a monopoly on strong market growth. The median CAGR under Republican presidents is 10.2%, while under Democratic presidents, it stands at 9.4%—a relatively small difference when viewed over multiple decades.
As we approach another election cycle locally, it’s important to tune out the political noise and stay focused on investment fundamentals. Markets generally perform well irrespective of political outcomes and history suggests that maintaining a steady, long-term approach will continue to be the most effective strategy.
Tips for Rational Investing and the Role of an Adviser
Successfully navigating the ups and downs of investing requires discipline, a clear strategy, and the ability to separate emotions from decision-making. Here are key principles to help investors stay rational, along with the crucial role an adviser plays in keeping them on track.
Have a Clear Investment Plan – A well-defined strategy, including asset allocation and investment goals based on individual risk tolerance, provides a roadmap for long-term success, preventing emotionally driven decisions.
Use Dollar-Cost Averaging – Consistently investing a set amount over time can help smooth out volatility and reduce the temptation to time the market.
Work with an Adviser – One of the most effective ways to combat emotional investing is to have a trusted adviser providing objective guidance. Advisers act as a buffer against impulsive decisions, ensuring clients stay focused on fundamentals rather than reacting to short-term noise.
Revisit Historical Market Data – Reviewing past market cycles reinforces that volatility is a normal part of investing, and recoveries often follow downturns. This perspective helps prevent panic-driven exits from the market.
As advisers, our role extends beyond financial expertise—we serve as behavioural coaches, helping clients remain disciplined during uncertainty. Emotional reactions, especially to political events, can lead to costly mistakes. By focusing on long-term fundamentals and maintaining a structured investment approach, investors can avoid common psychological pitfalls and achieve better financial outcomes.
General Advice Warning:
Any general advice on this page does not take account of your personal objectives, financial situation and needs, and because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Information contained on this page was correct at the time of posting.