The psychology of money: How emotions impact your investments
3 Minute Read
Summary
- Loss aversion strongly influences investor behaviour, making losses feel more painful than gains.
- Fear, overconfidence and market volatility can derail disciplined investment strategies and long-term returns.
- Managing emotions through long-term focus, limited portfolio checking and adviser support improves outcomes.
It seems to be a universal truth when it comes to money: when your investments go up, you feel good. When they go down, it stings.
And that sting? Research shows it hits much harder than any gain ever will.
Understanding loss aversion
The pain of losing money drives investing behaviour: the urge to check, react, and sometimes act too quickly. It’s not a lack of discipline—it’s human nature.
Psychologists call this “loss aversion,” and it influences many of our financial decisions, including how we invest.
“For most investors, money isn’t just numbers on a statement—it represents future goals,” explains Meghan Steinmann, Associate Wealth Advisor at PWL Capital. “When we invest, we’re committing today’s resources to an uncertain future.”
Why fear can derail good decisions
It makes sense. We work hard for our money, and we all have goals and wants for our future, whether that is buying a house, raising a family, or saving for retirement. Market volatility is stressful, and even when we know markets rise and fall, it’s normal to feel anxious.
The problem arises when fear and other emotions start to hinder our investment strategies.
Steinmann notes two common behavioural challenges in investing. The first is reacting to market declines by moving money to cash. This is based on the idea that you can guess the right time to get in and out of the market, but it’s almost impossible to do this consistently. Most people who try end up selling low and missing the chance to recover losses when the market goes back up.
The second challenge is performance chasing, where investors buy when prices are high and sell when returns are low. This pattern often leads to lower returns and increased stress.
When overconfidence works against you
According to Steinmann’s experience, overconfidence that leads to frequent portfolio changes is one of the biggest hindrances to a client’s portfolio. Even when decisions are made with the best intentions, frequent changes and tinkering can reduce returns.
“The more investors trade based on short-term views, the more likely they are to underperform a disciplined, long-term approach,” she explains. “Sometimes the most difficult decision is choosing not to act, but it can also be the most rewarding.”
Building a strategy that supports your goals
So how can you prevent your emotions from negatively impacting your investment strategy? Some outside expertise from an experienced professional can be a good place to start.
Steinmann emphasizes that no portfolio is perfect, but having a sustainable one is crucial. At PWL Capital, the approach centers on helping clients build portfolios they can stick with through market ups and downs, focusing on core financial goals rather than products or predictions. This helps clients stay steady during market turbulence rather than reacting to headlines or short-term swings.
Emotions aren’t the enemy
The fact is that emotions and investing go hand in hand, and this isn’t necessarily a weakness, but rather something to acknowledge. Understanding and learning to manage your emotions can be beneficial. After all, there are several emotional mindsets, such as patience, humility, and care, that can work in an investor’s favour. Other emotions, however, do need to be filtered, and sometimes that requires some extra help.
Steinmann says, “successful investing isn’t about eliminating emotions, but about building a strategy that helps prevent emotions from driving decisions.”
Practical tips for staying grounded when markets move
The key isn’t to eliminate your reactions, but to manage them. Staying grounded in a volatile market comes down to a few simple habits.
-
Focusing on your long-term goals provides a needed perspective during periods of market volatility. While markets fluctuate by nature, your goals tend to remain much more stable.
-
Limit how often you check on your portfolio to reduce your stress.
-
Lean on an adviser. Since emotions are an unavoidable part of investing, having someone who understands your goals and can offer a steady, objective voice can make a meaningful difference during uncertain periods.
-
Remember that volatility is not a flaw in investing. It is the price we pay for long-term growth. Uncertainty is expected, and strong investment plans do not try to avoid it. Instead, they are designed to withstand it. Over time, consistency – not reaction - is what drives results.
Ready to get started or need some help on your own investment journey? Get in touch with PWL Capital today.
