Investing goes beyond the numbers – it also brings out a wide range of emotions; from optimism and excitement to doubt and concern.
Whether the ASX is rising or falling, emotional responses can influence your decisions just as much as economic data. Understanding those responses is an important step toward building resilience, especially in unpredictable times.
These patterns underscore the importance of long-term perspective, especially in a market shaped by both global sentiment and uniquely local factors.
How emotions enter the equation
We like to think our financial decisions are rational, but in reality, they are shaped by much more than logic. Investors aren’t robots crunching numbers in isolation. We are influenced by the news, social circles, and the stories we hear.
When markets are rising, it’s easy to get caught up in the excitement or feel pressure to act quickly. During downturns, anxiety and regret can push investors to sell at a loss, despite having sound long-term strategies.
We’ve seen this pattern repeat over time. Remember, emotional investing isn’t just a beginner’s problem. Even seasoned investors can be swept up by sentiment if safeguards aren’t in place.
Psychologists have long observed how financial stress activates similar responses to physical threats, triggering fight-or-flight instincts rather than thoughtful analysis. That’s why even well-informed investors may react defensively when facing market instability.
The good, the bad and the balancing act
Emotional investing isn’t all risk. In the right conditions, it reflects conviction, clarity and purpose. For example, values like patience and belief in the future can help investors stay committed during market dips.
Life changes such as home ownership, welcoming a child or retirement can bring useful emotional clarity to financial decisions, and ethical investing often stems from emotions such as care and connection to community.
When used with discipline, emotions can reinforce sound decisions rather than undermine them. Investors who use emotional clarity to establish long-term goals tend to feel more confident, even when short-term volatility strikes.
That said, emotions can also derail strategy. Panic selling during downturns, overconfidence after gains and herd mentality all pose risks.
During the 2022 market correction, many Australians withdrew from their super investments prematurely, missing the recovery that followed. These decisions weren’t always driven by fear alone, but often from a desire to do something, even when patience may have been more effective.
Learning from behavioural finance
Behavioural finance gives us tools to interpret emotional reactions. Biases like loss aversion, recency bias and anchoring affect decision-making in subtle but powerful ways.
These include:
- Loss aversion – Losses tend to feel more painful than equivalent gains feel rewarding, which can lead to overly cautious or reactive choices.
- Recency bias – We often give too much weight to recent events, assuming short-term trends will continue.
- Anchoring – Fixating on a past portfolio value or arbitrary benchmark can skew rational assessment.
Understanding these patterns won’t eliminate emotional reactions but it can help you respond to them more thoughtfully.
After all, markets are always shifting. Emotions will always emerge. The goal isn’t to shut them out, but to understand them and develop structures to keep emotions from steering the ship. When investors learn to pause, reflect and act with intent, they not only improve outcomes but feel more confident in their journey.
Next steps
Our experts at Nexia can help you to develop a long-term strategy connected to your personal goals. Reach out today.
