If you’ve been paying attention to the market over the past few weeks, you’ve likely noticed a lot of changes. Just two weeks ago, the market saw a drop of 5-10%, only for it to bounce back 11 trading days later like the decline never happened. It’s enough to make anyone feel a little overwhelmed. So, how do you stay calm and make smart investment decisions amid all this noise?

It’s tempting to get caught up in the day-to-day market movements, but those short-term fluctuations shouldn’t derail your overall plan. That said, investing isn’t just about numbers and logic—it’s emotional, too. When the market gets uneasy, our natural instincts and biases kick in, sometimes leading us to make decisions we later regret. To become smarter investors, we need to recognize the common biases that influence our decisions and learn how to overcome them.

5 Biases That Influence Investment Behavior

 

1. Recency Bias

Ever notice how when the market drops, it’s easy to think, “Well, it’s probably going to keep going down”? That’s recency bias at work. We give more weight to recent events when predicting the future, which can cloud our judgment. For example, if the market drops 4% in a day, we tend to assume that trend will continue simply because it just happened. But this kind of thinking can lead to impulsive decisions, like pulling money out of the market just because of a temporary dip. Instead of letting short-term trends dictate your strategy, remind yourself that long-term success isn’t determined by a single bad day (or even a few).

2. Loss Aversion

Have you ever been more upset about losing $100 than excited about gaining the same amount? That’s loss aversion. The pain of loss is often stronger than the pleasure of gain, which can lead to overly cautious decisions. When markets drop, loss aversion makes us panic and sell, even though we know downturns are part of investing and may present opportunities to buy. To avoid this, remind yourself that the market’s ups and downs are normal, and that sticking to your plan is usually the best course of action.

3. Anchoring Bias

Anchoring bias happens when we latch onto a specific number—like the all-time high of a stock or our portfolio. For example, if you buy a stock at $100 and it rises to $150 before dropping to $130, you might feel disappointed, fixating on that $150 figure even though you’ve still made a solid return. By focusing too much on past highs, we lose sight of the bigger picture, which can inhibit smart investment decisions. Instead of looking where a stock was, try to view your investments in terms of overall growth and long-term goals.

 4. Herd Mentality

Herd mentality is the tendency to follow the crowd. If everyone is buying a particular stock, it’s easy to feel the pressure to jump on the bandwagon. Similarly, if headlines suggest that people are selling in droves, we might be tempted to do the same. But following the crowd can lead to buying high and selling low—the opposite of what we should aim for. Smart investing often means going against the grain, even when it feels uncomfortable.

5. Overconfidence Bias

Overconfidence bias is when we believe we know better than the market. Whether it’s picking individual stocks or predicting market trends, overconfidence can lead to impulsive decisions, over-trading, and ignoring risks. While it’s natural to feel confident when we’re informed, it’s important to remember that no one can predict the market with certainty. Staying humble and sticking to a well-thought-out plan is the best way to avoid costly mistakes.

3 Ways to Protect Yourself from Investment Biases

• Acknowledge the Biases: Awareness is the first step. Understanding how these biases influence your decision-making can help you take a more logical, rather than emotional, approach to investing.
• Maintain Discipline: Stick to your long-term investment plan, even when emotions are running high. When you have a well-thought-out strategy, it becomes easier to resist the urge to make impulsive changes during market volatility.
• Avoid Common Pitfalls: Don’t chase trends, panic sell, or hold on to losing investments out of fear. Staying patient and trusting your plan will likely pay off in the long run.

Investing is a marathon, not a sprint. By recognizing and addressing common biases, you can stay on track with your long-term financial goals, even during unstable times. Remember, a clear investment plan rooted in logic and discipline is your best defense against emotional decision-making. If you’re looking for help creating or refining your investment strategy, don’t hesitate to reach out for guidance—after all, investing with patience and a long-term perspective is the key to success.