Why it's Hard to Stay Disciplined in Volatile Markets

A long-term retirement investment strategy, resulting from a sound financial plan, is only as good as an investor’s ability to stay disciplined when the going gets tough. It is easy to be confident in your investments during extended periods of market growth, but studies show that this confidence can be fleeting at the first sign of trouble.

Dalbar Inc. is an independent investment research firm launched in 1976 that has been studying investor behavior in detail for nearly 40 years. In a recent study titled 30 Years of Average Equity Fund Investor vs. Indexes, Dalbar shows that from the beginning of 1992 to year-end 2021, the average equity investor generated an average annualized return of 7.13%. The average annualized return of the S&P500 Index during this same time frame was 10.65%. The key difference here is specifically attributed to – you guessed it – investor behavior.

History tells us that during times of volatility, the market eventually recovers its losses and finds higher highs. Therefore, when times are uncertain, we are not so much at odds with the stock market. The real enemy that stands in the way of our long-term investment success is ourselves.

So why is it so difficult to stay disciplined in volatile markets? Every investor succumbs to some degree of inherent biases and behaviors that grant us impulse to act imprudently.

Loss Aversion

Overreacting to a down market can cause investors to realize losses that they otherwise could have recovered had they held their ground. This overreaction is caused in part by loss aversion bias. Investors are by default more sensitive to losses than to gains. In other words, the pain felt when you log into your investment account and see a -15% return is far more emotionally riveting than the experience of logging in to find a +15% return on the same account. The experience of a volatile market cannot be matched by the euphoria and excitement of an up market. For the average investor, losing hurts more.

“This Time Is Different” Syndrome

Another cause for investors to make changes to their accounts is thinking “this time is different”, also known as “we have never seen anything like this before” syndrome.

The market has endured countless periods of correction and uncertainty. The market has experienced the 2020 COVID-19 recession, the 2008 Global Financial Crisis, the Dot-Com Bubble, and many more dating all the way back to the stock market crash of 1929. In the last decade alone, we have experienced almost 20 different market corrections of -5% or greater. There is always a new headline, a new person in office, a new war, a new debt crisis – some new phenomena that we have never seen before, which leads investors to believe that “this time, it is different. This time, I will lose money if I don’t get out. This time, the market won’t recover in time.”

If the amalgamation of all these economic events should teach us anything, it is that the market eventually recovers – regardless of the headline. Having an asset allocation that is properly set up according to your investment time horizon and risk tolerance can help prevent you from having to sell investments during times of uncertainty.

At Insight, our financial advisors are fiduciaries equipped to help you stay committed to your financial plan and stay disciplined through volatile markets. By having honest conversations about your goals, staying strong to avoid your natural aversion to loss, and keeping focused on the retirement “big picture”, we can help you overcome some of the behavioral pitfalls of investing.

Written by,

Paolo Coronel

Paolo Coronel

Paolo joined Insight Wealth Strategies in 2019 and works as an Associate Advisor on our Advisory team creating financial plans and implementing investment management strategies for our clients. He holds a Bachelor’s degree in Finance from California Baptist University and has previously passed his Series 7 and 66 licenses as well as his CA life, health and variable insurance.

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Quantitative Analysis of Investor Behavior Report, 2022, Dalbar Inc.

S&P 500 Corrections >5% since March 2009 Low, Chart, 2022, Charlie Bilello




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