Giving In to Panic Selling
One of the biggest and most common mistakes is selling investments in a panic when prices fall. This reaction is driven by a psychological bias called loss aversion, where the pain of a loss feels more intense than the pleasure of an equivalent gain.
When you see your portfolio's value decline, it's natural to want to stop the bleeding. However, selling in a downturn simply "locks in" your losses, turning a temporary paper loss into a permanent one. Markets operate in cycles, and history shows that downturns are typically followed by recoveries. By selling out of fear, you not only realise your losses but also risk missing the market's best recovery days, which often occur unexpectedly during periods of high uncertainty.
Trying to Time the Market
It’s the ultimate investor fantasy: selling at the absolute peak and buying back at the very bottom. In reality, consistently timing the market is nearly impossible, even for seasoned professionals. Attempting to do so is a classic beginner's error. Many who sell during a downturn, planning to reinvest when things calm down, end up waiting too long. The strongest market rebounds can happen quickly and without warning. Missing just a handful of these key days can significantly impact your long-term returns. A more reliable strategy is consistent investing over time, which smooths out your purchase price and removes the pressure of making perfect predictions.
Following the Herd
When markets get choppy, a 'safety in numbers' instinct can take over. This is known as herd mentality, where investors mimic the actions of a larger group, buying or selling assets simply because everyone else seems to be doing it. This behaviour is often fuelled by fear of missing out (FOMO) during rallies or panic during crashes. However, the crowd is often wrong, buying at inflated prices during bubbles and selling at the bottom in a panic. Making decisions based on social media hype or widespread anxiety rather than your own research and financial plan is a recipe for buying high and selling low.
Abandoning Your Long-Term Plan
A well-thought-out investment plan is your roadmap, designed based on your goals, time horizon, and risk tolerance. Volatile periods are not the time to throw that map away. Drastic changes to your portfolio in reaction to short-term market movements can derail your progress. If your financial goals haven't changed, your core investment strategy probably shouldn't either. Instead of reacting to headlines, use this time to review your plan and confirm it still aligns with your long-term objectives. Sticking with your plan provides a framework that helps you stay focused on what you're trying to accomplish, rather than getting swept up in short-term uncertainty.
Checking Your Portfolio Obsessively
In a volatile market, constantly checking your investment app can become a source of major anxiety. While staying informed is good, obsessive monitoring often leads to emotional decision-making. Every dip and swing can feel magnified, increasing the temptation to react impulsively. This is often driven by recency bias, where we give more weight to recent events and expect them to continue. Limiting how often you check your portfolio—say, to once a week or even once a month—can create the emotional distance needed to stick to your long-term plan and avoid making rash moves based on day-to-day market noise.
Investing More Than You Can Afford
Market downturns highlight the importance of another key rule: don't invest money you might need in the short term. If you've invested funds earmarked for an emergency, a down payment, or other near-term expenses, you're putting yourself in a vulnerable position. A market drop could force you to sell at a loss to cover those costs. Before investing, it's crucial to have a solid cash reserve—typically three to six months of living expenses—in an accessible savings account. This financial cushion provides peace of mind and ensures you won't have to disrupt your long-term investments to handle life's unexpected events.
