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Behavioural Finance Insights: Why Investors Panic and How to Stay Disciplined for Great Investments Programme
- Alpesh Patel
- Jun 30
- 21 min read
Investors often panic during market volatility, selling stocks and moving into cash, only to attempt re-entry based on short-term market moves. This behaviour – essentially buying high and selling low – is destructive to long-term returns.
Studies consistently show that the average investor significantly underperforms the market due to such poor market timing. For example, one analysis found that over 20 years the SCP 500 returned about 10.7% annually, but the average equity investor earned only about 7.1%.
Behavioural finance offers insights into why investors fall into this trap – citing biases like loss aversion and recency bias – and provides strategies to help investors adopt a more disciplined, long-term mindset.
This paper reviews key behavioural finance principles behind market-timing tendencies, examines why market timing usually fails, and outlines practical frameworks and strategies (with real examples) to guide active investors toward a structured, long-term investment approach.
Behavioural Biases Fuelling Panic and Market Timing
Behavioural finance, which integrates psychology with economics, has identified several cognitive biases that lead investors to make irrational, short-term decisions. Below is an overview of the key biases that drive investors to panic-sell during volatility and impulsively time the market:
Loss Aversion
Loss aversion refers to our tendency to feel the pain of losses much more than the pleasure of equivalent gains.
In investing, this bias makes the prospect of losing money so painful that investors will do almost anything to avoid it – even abandoning a sound strategy. When markets turn volatile and portfolios drop, loss-averse investors experience intense fear.
Research suggests people are roughly twice as sensitive to losses as to gains. This can trigger fight responses like selling stocks in a downturn to stop the “bleeding.” By fleeing to cash at the first sign of trouble, loss- averse investors hope to avoid further losses, but in doing so they often lock in those losses and miss the recovery.
In short, loss aversion explains why investors panic-sell at the worst times: the immediate pain of a loss looms larger than the abstract future reward of staying invested.
Recency Bias
During turbulent times, many investors fall prey to recency bias – overweighting recent events and assuming those trends will continue. After a market drop, they become convinced that more losses are coming, because the recent past (the downturn) dominates their outlook.
For example, in the 2008–2009 financial crisis, many investors who watched the market plunge developed a dismal outlook and pulled out of stocks, expecting further economic doom. In reality, the economy recovered and markets rebounded strongly in subsequent years.
Recency bias distorts decision-making by making the latest market move (a sharp decline or rally) feel more important than long-term historical probabilities. This bias can cause trend- chasing as well – investors pile into whatever has been rising recently (for fear of missing out) or flee assets that have been falling.
Both behaviours lead to buying high or selling low. Overcoming recency bias requires zooming out: remembering that markets move in cycles and that recent volatility may not foretell the future.
Overconfidence
Many active investors believe they can outsmart the market – timing their exits and entries to avoid losses and capture gains. This overconfidence bias leads investors to overestimate their knowledge or ability to predict market moves. Overconfident investors trade frequently, convinced each move will improve performance. In practice, the opposite usually happens.
Research shows that frequent trading is hazardous to wealth: one study of 10,000 brokerage accounts found that the stocks investors bought underperformed the stocks they sold by 5% in the following year.
In other words, the more actively people traded, the worse their results. Another large study of 66,000 households over six years found that the most active traders earned an average annual return of only 11.4% while the market returned 17.9%.
This massive performance gap is attributed to overconfidence leading to bad timing and excess transaction costs. Overconfident investors often ignore the role of luck and volatility, attributing any success to skill and doubling down on risky bets.
When volatility spikes, they may also be overconfident in their ability to get out “just in time” – a dangerous belief. Recognizing overconfidence is key to avoiding rash market-timing trades and embracing a more humble, long-term approach.
Regret Aversion
Regret aversion is the bias where investors avoid making decisions for fear that the outcome will cause regret. This can manifest in two harmful ways: impulsive action or paralysis. During a market downturn, an investor might panic-sell because they’d deeply regret it if they stayed invested and the market kept crashing. In such cases, fear of future regret (“I’ll kick myself if I don’t sell now and lose even more”) drives them to cash out.
Unfortunately, after selling, these same investors often get stuck on the sidelines – afraid to buy back in and risk regret of another loss, they remain in cash way too long. Regret aversion thus keeps them out of the market during the recovery.
On the flip side, regret aversion can also cause missed opportunities: an investor might fail to invest in a sound long-term plan because they worry they’ll regret it if things go wrong. In both cases, decisions are being made (or avoided) to minimise potential regret rather than maximise long-term benefit. An extreme example is an investor who sells everything in a panic, then hesitates to re-enter until markets feel “safe” – by which time most of the rebound has passed.
Understanding regret aversion helps investors realise that inaction and staying in cash can be just as damaging and regretful in the long run. The antidote is to focus on long-term probabilities and remind oneself that short-term mistakes or missed moves are recoverable, but abandoning a long-term strategy is not.
Other Biases: In addition to the above, there are other behavioural tendencies that exacerbate market-timing mistakes
Recognising these biases is the first step in avoiding them — and in making more rational, long-term decisions.
For example, herd behaviour (following the crowd during panics or manias) and confirmation bias (seeking information that validates one’s fearful or greedy impulses). These biases often work in concert.
For instance, seeing others panic-sell can reinforce one’s own fear (a herd effect), and consuming news that confirms a doomsday outlook can bolster the decision to stay in cash (confirmation bias). Overall, behavioural finance shows that investors are not perfectly rational; emotional biases can hijack decision-making in times of stress. Recognising these biases is the first step toward correcting course.
Why Market Timing Often Fails
Timing the market – jumping in and out to avoid losses or capture gains – sounds appealing in theory. In reality, it is extraordinarily difficult to execute successfully over time.
Investors who tried to time the market significantly underperformed the broader index due to emotion-driven decisions and poor timing
Empirical data overwhelmingly shows that market timing tends to hurt, not help, investor returns. There are several reasons why this is the case:
Unpredictability of Markets: Short-term market movements are notoriously hard to predict. Prices are influenced by countless factors (economic data, earnings, politics, investor sentiment) that even professionals struggle to forecast.
If you miss the 10 best days, your $10k investment drops by over 50% — most of those days follow steep market falls. One famous analysis noted that even professional mutual fund managers failed to predict all of the major market turning points – a Goldman Sachs study cited by Burton Malkiel found fund managers collectively missed the market’s nine biggest reversals over a 20-year period.
If the pros cannot time the ups and downs, it’s even less likely an individual retail investor can consistently outguess the market’s next move. Markets often surprise us: bad news can already be “priced in,” and sudden rallies often occur when the outlook is darkest. Thus, attempts to move to cash before a drop or get back in right before a rally often misfire.
“Missed Best Days” Effect: Successful timing requires being right twice – knowing when to get out and when to get back in. Investors who sit in cash to avoid losses usually do not re-enter in time for the rebound. The market’s biggest up days often cluster around the worst days (for instance, a huge rally may occur shortly after a steep decline). Missing just a few of these crucial rebound days can devastate long-term returns.
Even missing just 10 of the best days from 2003–2022 cuts returns nearly in half. The cost of mistimed exits is steep.
For example, as illustrated below, a $10,000 investment in the SCP 500 from 2003 to 2022 would have grown to about $64,844 if fully invested the whole time. But an investor who missed just the 10 best single days in that period would only end up with about $2G,708 – less than half the value. Missing the 20 best days shrinks the final value to around $17,826, and missing the 30 best days leaves only $11,701. In other words, just a handful of missed rallies can wipe out the majority of an investor’s return.
This dramatic gap shows why market timing is so perilous: the cost of being out of the market during a few key days is enormous. Since those big days are nearly impossible to predict or consistently capitalise on, a timing strategy often backfires and leaves the investor worse off than a simple buy-and-hold approach.
Average Investor Underperformance: Real-world data on investor results underscores the failure of market timing. As noted earlier, studies like DALBAR’s research on investor behaviour finds a persistent gap between market returns and investor returns, largely due to poorly timed buying and selling.
Investors as a group tend to pour money into stocks near market peaks (greed after recent gains) and withdraw money during market bottoms (fear after losses).
This behaviour means many investors sell low and buy high. One analysis of mutual fund flows found that 39% of all new money went into the top 10% best-performing funds of the prior year– essentially chasing yesterday’s winners.
Such timing strategies often lead to subpar performance when those “hot” funds mean-revert or when panicked sales occur right before recoveries.
The result is a well-documented “behaviour gap”: investors often earn much less than the funds or markets they invest in, simply because of poor timing decisions. As an investment proverb puts it, “The stock market is a device for transferring money from the active to the patient.”
Indeed, legendary investor Warren Buffett quipped that “our stay- put behaviour reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient”. Those who jump in and out frequently are often on the losing side of that transfer.
Costs and Taxes: Frequent trading incurs transaction costs, and in taxable accounts it can trigger taxes on gains. While commissions have largely dropped to zero today, bid- ask spreads and market impact can still eat away at returns for active traders. More importantly, short-term capital gains taxes can significantly reduce net profits from any correctly timed trades.
These frictions mean a market timer not only has to be right about the market’s direction, but right enough to overcome the additional cost drag – an extremely high bar. Long-term investing defers or minimises taxes, whereas jumping in and out can lead to a hefty tax bill that offsets any benefit of sidestepping a decline.
Emotional Whipsaw: The very emotions that drive market timing often ensure its failure. An investor who sells in panic during a downswing might plan to buy back in when things “calm down.” But by the time the market feels safe or news turns positive, prices may be much higher.
Then greed kicks in during bull runs, and investors who re-enter late may overextend just before a correction – restarting the cycle of fear. This emotional whipsaw leads to systematically buying at high levels (when optimism abounds) and selling at low levels (when pessimism peaks). It’s the opposite of a sound strategy. As Peter Lynch famously observed, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.” In other words, the act of dreading and dodging market volatility often does more damage to wealth than the volatility itself.
In sum, market timing fails for most people because it asks them to do the near-impossible: predict short-term market moves consistently, resist powerful emotional impulses, and overcome costs. The far easier and more effective approach, as we will discuss, is to adopt a disciplined long-term strategy that doesn’t rely on being able to time the market’s zigs and zags.
The Psychological Impact of Short-Term Volatility
When markets become volatile and portfolios swing wildly, it can have a profound psychological impact on investors. Short-term volatility triggers emotional responses – primarily fear and anxiety – that distort rational decision-making. Understanding these psychological effects can help investors recognise when their fight-or-flight instincts are undermining their long-term plans.
Firstly, volatile markets produce stress and loss anxiety. Watching a portfolio lose value day after day is emotionally draining; it can even be physically painful in a sense. Neuroeconomics research shows that the brain processes financial losses similarly to real, visceral pain. This aligns with loss aversion – losses feel awful, so a streak of negative days creates a crescendo of pain and fear. Investors start to fixate on the immediate downturn and forget the bigger picture. The more frequently one checks portfolio values during volatility, the more losses one is likely to see, reinforcing panic.
Behavioural economists call this phenomenon myopic loss aversion – “myopic” because of the short-sighted focus on immediate losses. Myopic loss aversion is essentially the combination of loss aversion and frequent evaluation: people who evaluate their investments very often (say daily or hourly) experience more stress and become more risk-averse. In fact, an experimental study found that investors who received the most frequent feedback on their investments (seeing all the ups and downs) took the least risk and earned the least money over time.
This happens because constant exposure to volatility magnifies the fear of loss, causing individuals to shy away from risk – often by selling or moving to cash after short-term losses. Thus, short-term volatility, when obsessively monitored, can trick investors into making long-term detrimental choices (like retreating to the sidelines).
Secondly, volatility can induce a sense of uncertainty and lack of control that the human mind finds hard to tolerate. In a rapidly falling market, investors often feel “I must do something!” to regain control.This is a key psychological trap: the action bias. Sitting still (holding one’s investments) during a storm feels psychologically harder than doing something (even if that something is counterproductive).
The action bias pushes people to react to every market move, amplifying trading and churn. Likewise, volatile markets are accompanied by sensational media coverage – bold headlines about crashes, recessions, bear markets – which further stoke fear. Constant news alerts and flashing red numbers play into our availability bias (making recent dramatic information feel overly important) and can lead to rash decisions. An investor might panic-sell after reading a dire prediction, even if nothing about their personal goals or portfolio has fundamentally changed. In short, short-term volatility hijacks our emotions, often causing a reversion to primitive instincts: fight (sell to avoid more pain) or flight (flee to cash).
Understanding this emotional rollercoaster can help investors avoid costly panic decisions and stay the course.
Finally, short-term swings can distort perceptions of risk. When markets are calm and steadily rising, investors underestimate risk and grow overconfident. But when markets swing sharply, people’s risk perceptions spike – they suddenly view the market as far more dangerous than before, even if long-term risk hasn’t materially changed.
This can lead to abrupt strategy changes: an investor may have been comfortable with a 70% stock allocation, but after a few bad weeks they suddenly feel that 70% in stocks is “too risky” and slash it to 20%. Such knee-jerk shifts are usually poorly timed (selling after the drop has occurred). They are driven not by a rational re-assessment of long-term risk tolerance, but by the psychological shock of volatility in the moment.
True risk tolerance should be based on the ability to meet goals over years and decades, not the emotion of the month. But during volatile periods, myopic fear overrides long-term thinking, and many investors morph from risk-takers to risk-avoiders at exactly the wrong time.
This is why the core challenge in investing is often emotional, not intellectual: having the fortitude to stay the course when your gut is screaming “get out” is hard. Understanding that short-term volatility inevitably comes and goes – and that our emotional reactions to it are often unreliable guides – is crucial. In the next sections, we discuss practical ways to cope with these psychological pressures and avoid self-sabotaging moves.
Frameworks for Disciplined Long-Term Investing
Given the powerful biases and emotions that can lead investors astray, it’s important to have practical frameworks and strategies in place to keep investment decisions disciplined and long-term focused.
The goal is to move away from reactive trading and toward a structured approach that can weather short-term volatility. Below are several frameworks and techniques that investors can use to instill discipline:
Investment Policy G Planning: Start with a clear investment plan or policy statement that outlines your long-term goals, risk tolerance, and asset allocation. This serves as a roadmap and a behavioural anchor. By formalising your strategy, you create a set of rules to refer back to when emotions run high.
For example, your plan might state that you maintain a 60/40 stock-bond allocation to reach a retirement goal 20 years away, with an allowance for a ±5% rebalance band. Having this written down ahead of time makes it easier to resist the urge to abandon your allocation during a market storm.
Instead of reacting impulsively, you consult your plan. Many financial advisors emphasise the importance of setting such a strategy and sticking to it. Knowing why you’re invested and what strategy you’ve committed to provides discipline – it’s a pre- commitment to rational behaviour. When volatility hits, remind yourself of your plan and time horizon. Ask, “Has anything changed about my goals or needs?” If not, there’s likely no need to change the portfolio.
Asset Allocation G Diversification: Asset allocation should align with your genuine risk tolerance – the level of volatility you can stomach without derailing your plan. If you find that a market drop is prompting you to panic-sell, it might be a sign your allocation is too aggressive for your comfort. In that case, proactively adjust your allocation during calm times (not during the storm) to one that you can stick with through thick and thin. A slightly more conservative mix that you hold onto is better than an aggressive mix that you abandon at the first downturn. The key is to set your allocation based on long-term considerations and then largely stick to it, using rebalancing (next point) to maintain the targets.
Systematic Rebalancing: Instead of ad-hoc trading, use rebalancing as a rules-based framework to guide portfolio adjustments. Rebalancing means periodically (say annually or when allocations drift by a certain amount) bringing your portfolio back to its target allocation.
Crucially, this process has you buy low and sell high in a disciplined way: when stocks have fallen and are underweight in your portfolio, rebalancing will prompt you to buy stocks (at lower prices) to get back to target. Conversely, after a strong stock rally, rebalancing will prompt you to trim stocks (locking in some gains) and reinvest in other areas that lagged. This systematic approach counteracts emotional impulses – you’re following a predetermined rule rather than chasing performance.
Systematic Rebalancing: A Disciplined Way to Buy Low and Sell High. When markets shift your allocation off balance, rebalancing brings it back in line — reinforcing a rules-based, long-term mindset.
It also leverages volatility to your benefit (by buying more shares when they’re cheap and selling some when they’re expensive).
Many investors find that adhering to a regular rebalancing schedule satisfies the urge to “do something” in a downturn – you do something constructive (buy more at a discount) as opposed to panic-selling. Over time, rebalancing enforces the discipline of buying low, selling high that market timers fail to achieve.
Behavioural Guardrails: Implement personal rules and guardrails to prevent impulsive decisions. For example, enforce a 24- or 48-hour rule for major decisions: if you feel the urge to sell everything in a panic, require yourself to wait two days and revisit the decision with a cooler head.
Often, the panic will subside and you’ll be thankful you didn’t act rashly. Another guardrail could be limiting how often you check your portfolio value during volatile periods. If checking daily causes you undue stress, consider checking just once a month or when necessary. This ties back to avoiding myopic loss aversion – less frequent monitoring can lead to more rational long-term choices. Additionally, some investors find it helpful to journal their thoughts during volatility – writing down why you want to sell and then later reviewing whether those fears materialised. This can reinforce learning that emotional reactions are often poor guides. Finally, consider involving an objective party – a financial advisor or even a disciplined friend – who can act as a circuit breaker.
They can remind you of your long-term plan and talk you through decisions when your emotions are running high. The famous investor Benjamin Graham noted that the investor’s worst enemy is likely themselves, and sometimes we need safeguards to protect us from our own instincts.
Education and Historical Perspective: Gaining knowledge about market history and long-term investing can fortify your mindset. When you realise that corrections (declines of ~10%) happen almost every year on average, and bear markets (20%+ drops) occur periodically, it becomes clear that volatility is a normal part of investing – not a signal that something is fundamentally wrong.
By studying historical cases, you’ll see that markets have recovered from crashes and gone on to new highs time and again. For instance, the crash of 1987, the dot-com bust in 2000, the 2008 financial crisis, the 2020 COVID crash – all were dire in the moment, but long-term investors who stayed the course were rewarded as markets eventually not only recovered but grew further. Keeping this perspective helps counteract the recency bias that might make the current downturn feel unique or never-ending. Some investors post reminders to themselves during crises – such as a chart of the market’s long-term upward trajectory despite past drops – to maintain confidence that “this too shall pass.” Education about the pitfalls of market timing also reinforces why not to try it. Knowing the data (like how missing the best days hurts returns, or how the average investor underperforms by chasing trends) can serve as intellectual armor against the temptation to time the market.
In summary, building a disciplined, long-term investment mindset isn’t just about willpower in the moment – it’s about setting up systems and habits that guide you regardless of short-term market conditions.
A solid plan, the right asset mix, automatic investing, rules to check emotional impulses, and a dose of historical perspective can collectively inoculate an investor against the urge to panic or recklessly trade.
By following these frameworks, you are effectively replacing reactive decisions with a structured process, which is key to successful investing.
Case Studies: Pitfalls of Market Timing in Action
History provides many vivid examples of how panic selling and market timing can lead to suboptimal outcomes. Examining a few case studies or scenarios can cement our understanding of these pitfalls:
The 2008–200G Financial Crisis: This period tested every investor’s nerves. As global markets plunged in 2008, many investors could not withstand the pain. U.S. stocks lost about 37% in 2008, and the outlook seemed bleak with banks failing and a deep recession underway. Investors pulled billions from equity funds near the lows, effectively capitulating and moving to cash. Thanks to recency bias, those who sold expected further losses – it was hard to imagine the market recovering anytime soon. But by March 2009, stocks bottomed and began an aggressive recovery. The SCP 500 rose about +68% from the March 2009 low to the end of 2009, and continued rising in 2010 and 2011. Investors who had fled to cash in late 2008 or early 2009 faced a tough dilemma: when to get back in? Many stayed on the sidelines, waiting for “clear signs” of recovery that only became obvious after prices had already rebounded.
As a result, a lot of the panic sellers missed the bulk of the 200G–2010 rally. By the time they felt confident to re-enter, stocks were much more expensive. This case shows how market timing during a crash can turn a temporary paper loss into a permanent loss – those who held their diversified portfolios through the crisis eventually saw them recover and reach new heights, whereas those who went to cash realised losses and likely re-entered at higher levels. It also demonstrated Peter Lynch’s point: far more money was lost by those bracing for a further crash (which didn’t happen) than by those who endured the crash with a longer view.
The COVID-1G Crash and Snapback (2020): In February–March 2020, global markets experienced one of the fastest crashes in history as the COVID-19 pandemic spread. The SCP 500 fell roughly 34% in just five weeks. Fear and uncertainty were extreme; even experienced investors felt panic because this downturn was tied to a global health crisis and economic shutdowns. Many investors again sold out in late March 2020, hoping to protect their portfolios from further damage. However, this downturn turned out to be unusually short-lived – massive fiscal and monetary stimulus, combined with optimism about eventual recovery, fuelled a powerful rebound. By late August 2020, the SCP 500 had fully regained its losses and hit a new all-time high, up ~55% from the March low. It was one of the quickest market recoveries on record. Investors who had panic-sold faced whiplash: in mere months the market went from despair to new highs.
Many who stayed in cash “waiting for a pullback to re-enter” found themselves waiting in vain, or ended up buying back at much higher prices.
This episode illustrates that even when a crisis is unfolding, markets can turn on a dime before the news fully improves. Those who tried to time re-entry perfectly likely missed a large portion of the upside. On the other hand, investors with pre-set rebalancing plans actually benefited – they bought more stocks in March when prices were down (rebalancing into equities after the drop) and then enjoyed the rapid recovery. The COVID crash taught the importance of sticking to a plan and the difficulty of predicting when sentiment will shift. It reinforced that staying invested through volatility, or at least re-entering promptly and systematically, is critical to capturing long-term gains.
Dot-Com Bubble and Aftermath (2000–2003): The late 1990s tech stock bubble and its burst in 2000 provide another angle on timing. Many investors piled into hot technology stocks in the late stages of the boom due to overconfidence and fear of missing out, only to see the NASDAǪ crash nearly 80% from 2000 to 2002. Those who bought at the peak experienced huge losses.
Some panicked and sold out near the bottom in 2002, swearing off stocks. However, by the mid-2000s and especially the 2010s, many tech companies and the market as a whole had recovered strongly. An investor who dumped their tech-heavy portfolio in 2002 would have missed the resurgence of high-quality tech stocks. Conversely, an investor who held a diversified portfolio through the bust still felt pain (the SCP 500 fell ~50% in that bear market), but if they rebalanced and perhaps shifted some funds into undervalued areas (like non-tech sectors), they would have been positioned for the eventual recovery.
The lesson here is nuanced: valuation matters, but trying to time bubbles and busts is very tricky. Selling after a huge drop might protect from further decline, but it also might cement the loss and forgo the rebound. A better approach could have been gradual risk reduction during the euphoria (trimming overly expensive positions, rebalancing) rather than an all-out exit at the bottom.
Crucially, don’t bet your entire portfolio on short-term trades or one market call. Maintain a base allocation that suits your risk tolerance (maybe it’s 70% stocks, 30% bonds for a moderate investor) and only deviate within defined bounds. By keeping a core, you ensure that even if some trades or timing attempts go wrong, you haven’t derailed your overall financial progress.
Maintain a Long-Term Mindset (Even in Active Trading): It sounds counterintuitive, but even active traders should ground their activities in a longer-term perspective. This means acknowledging the overall upward trend of markets and the power of compounding over years. When volatility hits, remind yourself that your goal is to grow wealth over decades, not to win every single trade. This can prevent the mentality of “I must avoid any loss now” that leads to panic selling. Incorporate some long-term investments in your portfolio that you’ve committed not to touch for years – for example, a retirement account with index funds or dividend stocks that you will rebalance annually but not trade frequently.
Knowing that a portion of your assets is steadily compounding in the background can reduce the temptation to over-trade the rest. It can also provide a benchmark – if your active picks can’t beat the performance of your long-term passive portion over, say, a few years, it’s a signal to reconsider how much effort to put into market timing versus just adding to long-term holdings. Essentially, treat your active portfolio like a business with a strategy and measures of success, not like a casino bankroll. Evaluate your performance honestly: keep records of your trades, compare them to a simple index return. Many overconfident traders never measure this and thus continue trading even if it’s not adding value. By keeping yourself accountable, you may naturally curtail excessive timing attempts and focus on approaches that work.
Continuous Learning and Adaptation: Markets evolve, and so can your strategy. Active investors should study both financial knowledge (fundamental and technical analysis, macro trends) and behavioural lessons. When you make a trading mistake, analyse it: Did emotion play a role? Did you buy it because of the hype? Did you sell out of fear? Use each experience to refine your rules. For instance, if you realise you sold a stock on a dip due to panic and it recovered, commit to a rule to avoid that next time (maybe incorporate a longer moving average to filter noise, or a reminder to check the company’s fundamentals before selling on price action alone).
Developing a more disciplined mindset is a journey. Some active investors even simulate scenarios or use paper trading to test how they would handle volatility with their rules, to ensure they’re prepared.
The bottom line is to approach the market with a plan and learning mentality rather than a seat-of-the-pants reactionary approach. By doing so, even active portfolio management can be systematic and less prone to the classic pitfalls of market timing.
Sources:
DALBAR. Quantitative Analysis of Investor Behavior (QAIB).
Morningstar. Mind the Gap 2023 Report.
J.P. Morgan Asset Management. Guide to the Markets – Q1 2023.
Charles Schwab. Does Timing the Market Work?
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica.
Odean, T. (1999). Do Investors Trade Too Much? American Economic Review.
Shefrin, H., & Statman, M. (1985). The Disposition to Sell Winners Too Early and Ride Losers Too Long. Journal of Finance.
CNBC. Missing the Market’s Best Days Can Be Costly.
Vanguard. Stay the Course During Market Volatility.
Ellis, C. D. (2017). Winning the Loser’s Game. McGraw-Hill Education.
Graham, B. (2006). The Intelligent Investor. HarperBusiness.
RISK WARNING: All investing is risky. Returns at not guaranteed. Past performance and case studies are no guarantee of future results.
Disclaimer: The content provided on this blog is for informational purposes only and does not constitute financial advice. The opinions expressed here are the author's own and do not reflect the views of any associated companies. Investing in financial markets involves risk, including the potential loss of your invested capital. Past performance is not indicative of future results.
You should not invest money that you cannot afford to lose. Mentions of specific securities, investment strategies, or financial products do not constitute an endorsement or recommendation. The author may hold positions in the securities discussed, but these should not be viewed as personalised investment advice.
Readers are encouraged to conduct their own research and seek professional advice before acting on any information provided in this blog. The author is not responsible for any investment decisions made based on the content of this blog.
Alpesh Patel OBE
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