As parents, we’re no strangers to rollercoasters – whether it’s the ups and downs of raising kids or the twists and turns of family life. But when it comes to the financial rollercoaster of the stock market, things can get a bit more nerve-wracking.
Picture this: the markets take a nosedive, and suddenly, your stomach sinks. You may be tempted to sell your investments before things get even worse. Or maybe there’s a sudden surge, and you’re tempted to ride the wave to potential riches. It’s easy to get swept up in the moment, but overreacting to market swings can lead to a losing strategy where you buy high and sell low – definitely not what we want for our family’s financial future.
Why we tend to over-react:
We are loss averse: “I could take the risk to make more money, but ultimately I’d rather not lose any money.”
As humans, we tend to feel the pain of losses more acutely than the pleasure of gains. When the market hits a rough patch, that sinking feeling of potential loss can lead us to hit the panic button and bail out of investments, even if it means locking in significant losses.
We have recency bias: “Well, if it’s been underperforming, it’s bound to keep underperforming.”
It is human nature to want to extrapolate recent market trends into the future, and assume that current trends will continue indefinitely. Unfortunately, this can lead to impulsive decisions based on short-term market movements rather than long-term goals.
We tend to follow the herd: “Everyone is buying, so I should too!”
We tend to engage in herding behaviour, where we follow the actions of the crowd, especially when we feel uncertain about the situation. During times of market volatility, this can lead us to buy or sell based on what everyone else is doing, rather than relying on our own analysis or strategy.
Some of us are overconfident: “Investing is simple. I got this.”
Some people exhibit overconfidence in their ability to predict market movements, or to time the market effectively. Overconfidence can lead to excessive risk-taking or thinking that we can outsmart the market. Spoiler alert: it rarely ends well.
Understanding the biases that influence our overreactions is crucial for developing effective behavioural solutions that can help you navigate market fluctuations more effectively.
Tips on how to navigate market madness, and keep your cool:
- Set your course, stay the course: Start with creating a long-term investment plan. To do this, create a well-diversified investment portfolio that is aligned with your financial goals and risk tolerance. Then, commit to sticking to the plan, rain or shine. This is called a pre-commitment. Consider writing down your commitment, and keep it somewhere visible so that you are occasionally reminded of it.
- Make it a family affair: Share your commitment statement with family and friends, so that you feel accountable to it. After all, it’s easier to stay the course when you have a support system cheering you on.
- Set it and forget it: Conduct the investment behaviour once, rather than relying on repeat behaviour. Taking the stress out of market watching by automating your investments. For example, invest a fixed amount of money at regular intervals regardless of market conditions. This helps smooth out the bumps of market volatility and keep you on track for the long haul.
By recognizing our biases and implementing smart behavioural strategies, we can navigate market volatility with confidence and steer our family finances toward a brighter future.
![Ada Le, PhD](https://www.embark.ca/wp-content/uploads/2024/06/Ada-Le-300x300-1.png)
Vice President, Strategy
Ada Le is a seasoned expert in behaviour change. She uses an understanding of the human mind to solve complex health system challenges and to bring a different way of thinking. At BEworks, Ada works with healthcare and financial institutions develop consumer behaviour change strategies. Ada is an award-winning researcher who has published in top-tier scientific journals. She holds a Ph.D. in Cognitive Neuroscience from the University of Toronto and was previously a postdoctoral research fellow at York University. At BEworks, Ada now brings her expertise to help companies solve consumer challenges all over the world.