The Real Cost of Emotional Investing and How to Avoid It
When markets get rocky, it’s easy to let emotions take the wheel. But reacting to short-term swings with fear or overconfidence can quietly erode your potential long-term returns. In fact, research shows that emotionally driven decisions can cost investors thousands over time, often without them even realising it.
One of the biggest triggers for emotional investing? Market volatility. Those sudden ups and downs in prices can make even the most seasoned investors second-guess their strategy. But volatility isn’t something to fear, it’s something to understand. And with the right mindset, you can learn to navigate it with confidence.
So, what exactly is volatility?
Volatility is a measure of how much and how quickly investment prices move. It’s not the same as a market crash or a bear market, but it can feel just as unsettling. Think of it as the market’s mood swings, sharp rises and falls driven by uncertainty, emotion, or big global events.
Volatility can be triggered by:
- Economic uncertainty
- Political instability
- Trade tensions
- Concerns about overvalued stocks
But here’s the thing: volatility is normal. It’s part of investing. And it doesn’t have to derail your long-term goals.
How investors typically respond
When markets get choppy, people tend to react in a few different ways:
Staying the course
Some investors ride it out. They know that time in the market usually beats trying to time the market. For example, someone who invested in the S&P 500 at its peak in 2007, just before the financial crisis, would still have doubled their money by simply holding on for 10 years. Capital at risk. Past performance is not an indicator of future gains.
Buying the dip
Others see volatility as an opportunity. When prices fall, they look for quality investments at a discount. It’s the classic “be greedy when others are fearful” mindset.
Selling out
This is the most emotional response, and often the most damaging. Selling during a downturn locks in losses and can mean missing the recovery.
Cost averaging
Some investors take a balanced approach by investing small amounts regularly. This strategy, known as pound-cost averaging, helps smooth out the highs and lows over time.
And what's the cost of emotional decisions in investing?
Emotional investing doesn’t just feel risky, it is. According to investment risk adviser Oxford Risk, emotionally driven decisions cost investors an average of 3% per year in lost returns. During periods of high stress or steep volatility, those losses can rise to 6–7% annually.
What you can do during volatile times
At NuWealth, we believe in helping you stay focused on what matters: your long-term goals. Here are a few tips to help you stay grounded:
Stick to your plan: Volatility is temporary. Your goals are not.
Avoid knee-jerk reactions: Selling in a panic often leads to regret.
Diversify: A well-diversified portfolio can help cushion the bumps.
Keep investing: Regular contributions can help you take advantage of lower prices.
When investing your capital at risk. This is not financial advice, always do your own research.
Final thought
Volatility can be uncomfortable, but it’s also a normal part of investing. With the right mindset and a solid plan, you can navigate the ups and downs with confidence.
NuWealth is here to help you stay on track, no matter what the market’s doing.
Want to learn more? Check out our learning hub for more tips and guides to building and managing your wealth.
