Bear Markets- A test of Investors’ EmotionsTanmay Gadre
During a bear market, your portfolio’s value is falling. You are receiving news highlighting the harsh realities of the stock market. It can become tough to escape the negativity that one feels. It is not just an uncomfortable experience; negative emotions affect one’s ability to make rational decisions.
There are 3 ways in which emotions can materially affect an investor during a bear market:
- Emotions can affect rational decision-making: Emotions may impact rational decision-making and lead us to irrational decisions. Elements that affect investors in such cases are powerful images and stories that amplify the emotional response. Fear and sense of increased risk will be increased due to anxiety and panic of other people.
- Emotions can lead to short-term decisions: Severe negative emotions make investors vulnerable and drastically reduce their decision-making time. Acting rapidly to respond to strong emotional cues is clearly a natural instinct many times. But it impacts their ability to withstand tough periods in the market or to invest for the long term.
- Emotions can make us ignore probabilities: In a bear market, one’s fears increase by the stories of how much worse things will get. Provoked emotions make one far less sensitive to changes in probability. The ability to reasonably assess the probability of future developments gets severely reduced. The strength of feeling outweighs the strength of evidence.
How to reduce the influence of emotions?
- An investor should remove oneself from the emotional stimulus. Turn off the financial market news and check the portfolio less frequently. Long-term investors should not do things that would provoke a short-term emotional response.
- One should never make in-the-moment investment decisions. These are likely to be driven by how one feels at that specific point in time. One should always step away and hold off from making a decision. Reflect on the decision with a calm state of mind.
These aren’t solutions as one cannot disconnect oneself from the impact of emotions on investment decisions. However, one must be aware that the negative feelings of stress, anxiety, and fear that one experiences during a bear market. These may encourage some of the worst behavior and one must do the best to avoid/reduce them.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”