Helping you serve your clients

Investing isn’t just a numbers game—it’s a mind game. And understanding the psychology behind our financial decisions can be just as important as understanding the markets themselves.

We all like to think we’re rational investors. But in reality, our emotions often drive our decisions—sometimes in ways we don’t even notice. With a general understanding of investment psychology, financial advisers are better positioned to support clients through market ups and downs, helping them avoid common traps so they are in a better position to meet long-term goals. Let’s dive into a few behavioral tendencies that many investors experience.

One common trap is FOMO, the fear of missing out. This is similar to what is known as the Lottery Effect.

This is when we put too much money into a single, high-risk investment, hoping for a big payoff. But just like the lottery, the odds are stacked against us. Over the past five years, a randomly chosen stock from the S&P 500 had a 37% chance of losing money. In contrast, diversified funds had only a 1% chance of a loss.

That’s why diversification is so powerful. It spreads risk across a range of investments, helping to smooth out the ups and downs. It may not be flashy, but it can be a great strategy for building long-term wealth.

Investors often feel the sting of losses more deeply than the joy of gains — This emotional bias, known as loss aversion, can lead to impulsive decisions like selling during market dips. Unfortunately, this often locks in losses and harms long-term returns. Financial advisers play a key role in guiding clients through volatility, reminding them that staying invested is usually more rewarding than trying to time the market.

We all need to recognize these psychological pitfalls. Staying focused on long-term goals, rather than reacting to short-term noise, is key. Because in the end, successful investing isn’t about timing the market—it’s about time in the market.