Commentary · Commentary
The Enemy in the Mirror: How Emotions Quietly Sabotage Investors
Written by the William Allan team · Published · Updated
Markets have created long-term wealth for many investors. Capturing a return, however, depends on more than the market’s path. It also depends on what you own, what you pay, and when money enters or leaves the portfolio.
Emotion can influence those decisions. Recognizing that influence is useful; assuming every disappointing result is a failure of discipline is not.
The gap between a fund and its investors
A fund’s reported return and the experience of someone investing in it can differ. Cash added before a decline or withdrawn before a recovery changes which returns that investor participates in.
Morningstar’s Mind the Gap research examines this difference. Timing can hurt returns, but a gap is not proof of an emotional mistake. Regular contributions, withdrawals for living expenses, and rebalancing can also produce different results from a buy-and-hold calculation.
That distinction matters. The useful question is whether a decision fits the plan, not whether the investor matched a number that assumes a different pattern of cash flows.
Fear and greed can shorten the horizon
During a rally, it can be tempting to assume recent gains will continue. During a decline, getting out can feel like the only way to regain control.
Neither feeling tells you what an investment is worth or whether it still belongs in the portfolio. A sale may be sensible when the underlying business, your circumstances, or the portfolio’s risk has changed. Buying may be sensible when the evidence supports it. The emotion alone is not the analysis.
Financial news can make every event feel urgent. Before acting, ask whether the information changes the long-term case for the investment or the purpose of the money.
Volatility and permanent loss both matter
Permanent loss of capital is an important risk. So is needing to withdraw money while prices are depressed. A decline cannot be assumed temporary before a recovery has happened.
An investor with time, adequate reserves, and a suitable allocation may be able to tolerate price swings. Another investor may have obligations that make the same swings difficult to absorb. FINRA’s discussion of volatility explains why liquidity and time horizon belong in that assessment.
Build a process before pressure arrives
Write down why you own an investment and what would change your mind. That gives you something more concrete than a price chart to revisit during a downturn.
Review when the money may be needed. Retirement spending, a home purchase, or an unexpected expense can change an otherwise long investment horizon.
Choose a review schedule that helps you stay informed without encouraging unnecessary trading. There is no universal rule that checking weekly produces better results than checking daily.
Use a trusted adviser or sounding board to challenge the reasoning behind a decision. The goal is not automatic reassurance to hold everything; it is a careful assessment of whether holding, selling, or rebalancing fits the circumstances.
The long game
A written process can help keep immediate feelings from making every decision. It does not remove uncertainty, make a poor investment sound, or guarantee a return.
Discipline is most useful when it means following a suitable plan and revising it when the facts warrant—not refusing to change course.
This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.