Emotions and Investing

Investing is as much about mindset as it is about money. If you’ve ever felt the urge to pull your investments during a downturn or go all in during a market surge, you’re not alone. Emotional investing is a common experience—but letting emotions drive your decisions can have a serious impact on your financial future.

Let’s explore how investor emotions tend to follow the market, the common phases investors go through, and some timeless principles that can help you stay grounded, calm, and confident through all kinds of market conditions. If you haven’t already, take a look at the Investor Emotion Cycle infographic below. It provides a helpful visual overview of the emotional journey many investors experience over time.

Understanding the Emotional Cycle of Investing

Our emotions often move in lockstep with the markets. When prices rise steadily, we feel confident—even euphoric. This can lead to overconfidence and riskier decisions. Ironically, this is often the point of maximum financial risk.

As momentum slows or markets decline, our emotions shift. Optimism fades into anxiety and fear. Some investors sell to avoid further losses, locking in setbacks that might have recovered with time.

Eventually, markets begin to rebound, and we slowly rebuild hope. These emotional swings are common—and being aware of them can help you manage your reactions.

Here’s a breakdown of the four phases many investors experience:

1. Optimism, Confidence and Euphoria

Investors feel good about the future. Confidence grows, but so does risk. Decisions at this stage can be driven more by emotion than by fundamentals.

Maximum Financial Risk often lies between Phase 1 and Phase 2—when investors are still feeling confident and markets appear strong, but early warning signs begin to emerge. This is when overconfidence can lead to missteps.

2. Concern, Fear and Desperation

As gains slow or reverse, emotions become unsettled. Many investors begin to question their choices.

3. Panic, Capitulation and Despair

Market declines can trigger panic. Some sell at a loss, while others feel stuck. This is also where maximum financial opportunity may exist for those who stay the course.

Maximum Financial Opportunity is typically found between Phase 3 and Phase 4—right when emotions are at their lowest and pessimism peaks. Those who remain invested or re-enter the market during this time often see the strongest long-term gains.

4: Indifference, Hope, Relief, and Optimism

As markets recover, investors begin to feel more optimistic. Confidence returns—restarting the cycle.

Recognizing where you are in this cycle can help you pause, reflect, and make smarter decisions. It’s okay to feel emotional—but it’s even better to have a plan.

Staying on Track in Uncertain Times

Diversified Portfolio

Spreading your investments across sectors and asset classes can help reduce the impact of any one area of the market underperforming. Diversification brings balance—and peace of mind.

Dollar Cost Averaging

Dollar cost averaging—investing the same amount regularly—takes the guesswork out of timing. You buy more when prices are low, less when they’re high. It’s a great way to stay disciplined.

Stay the Course

Your investment strategy was built around your goals. A market swing shouldn’t change your destination. Stay focused, and check in on your progress instead of reacting to the noise.

Don’t Time the Market

Trying to guess when to get in or out of the market rarely works. Missing just a few of the best days in the market can cost you significantly. It’s not about perfect timing—it’s about consistent participation (Investopedia).

Think Long Term

Short-term headlines can cause stress, but long-term performance often tells a different story. Markets have recovered from every downturn in history. Stay invested in your future.

Let’s Talk

If you’re feeling uncertain or emotional about your investments, we’re here to help. We’ll revisit your goals, review your strategy, and help you move forward with confidence. You don’t have to navigate the ups and downs alone.

Final Thoughts

Emotions are part of investing—but they don’t have to control your journey. When you understand how emotions play a role and use sound investment principles to guide your decisions, you’ll be better equipped to stay steady through market cycles.

Need help applying this to your situation? Let’s connect.

Sources:

“Investor Emotions.” National Bank Direct Brokerage, https://nbdb.ca/learning-centre/start-self-directed-investment/creating-investment-plan/the-cycle-of-investor-emotions.html.

“The Roller Coaster of Emotional Investing.” Visual Capitalist, https://www.visualcapitalist.com/sp/roller-coaster-of-emotional-investing/.