When is it Easy to Invest?

Is it ever easy to invest in stocks? I don’t know. Investors hate investing when markets are down significantly, have a hard time when markets are at all-time highs, and detest volatility when markets fluctuate up and down.

Investing During ‘Good Times’

Currently, we have several economic factors at all-time highs (home prices, net worth, corporate earnings) and stock markets are at all-time highs. Yet, there seems to be a bifurcation in investor attitudes. Some are enjoying the gains and feeling better about things, which often leads to aggressive investing. Others are concerned we are overextended and due for a pullback.

I was recently conversing with Emotional Investor blog reader and financial advisor, Chris Grassel. He brought up that many investors are relishing the gains from the growth parts of the portfolio and are resistant to “sell high, buy low.” They view rebalancing as limiting their future (perceived guaranteed) gains. Why is this? You can thank dopamine. Neuroscientists have found that the brain scans of investors imagining future gains were indistinguishable from individuals high on cocaine.1 Yep, we can get high on gains, which impairs our perception of risk – we just want the next hit.

Those concerned about a pullback know deep down that nothing lasts forever. And that is a truth! It may be a truthful statement, but it can unconsciously result in market timing. Investors don’t want to lose money in the inevitable future correction, so they go to cash or remain in cash. Either way, such action results in investors speculating with their money. They are no longer investing; they are speculating. Empirical evidence shows that market timing is a high stress, low return activity. But they do it anyway because it feels good in the moment.

Investing During ‘Bad Times’

Investing during bad times is extremely difficult. Forget about the quotes about being greedy when others are fearful…when we feel fear and the outlook is awful, our survival instinct weighs much heavier than a nice investment saying (even if truthful). Investing as markets go down and are most certain to continue going down requires a strong stomach, the ability to look away, and lots of patience.

You almost have to be a glutton for punishment to invest when markets are going down. And remember, markets don’t just go down because the current situation is dire, but because the outlook is just as bad (or worse). In other words, investing during selloffs means there is little to no hope of a turnaround anytime soon. You have to be willing to see your investment lose money because no one invests at the very bottom. Contrary to our survival instinct.

Making Investing Easier

You can see from above that whether the markets are up or down, investing is hard because of our emotions – the way we feel. Therefore, all we need to do is not have these feelings and we will be golden! That is true, but impossible to do because emotions and feelings are hardwired into who we are. We can’t pretend we don’t have them. So what do we do?

Set a defense! Understand what causes you to feel certain ways, and how those feelings entice you to act. Few financial advisors and investors are aware of or utilize a Behavioral Plan, but that plan can be just as valuable (if not more) than a financial plan. The behavioral plan recognizes our tendencies, biases, and helps investors think more rationally (less emotionally) about decisions. It’s not a Holy Grail, but absolutely essential to help investors process information more rationally and act more in line with their long-term goals.


(c)2024 Behavioral Finance Network


1. Zweig, Jason. Your Money, Your Brain.