Why We Freak Out with Market Fluctuations (And Why We Probably Shouldn't)

by Kaitlyn Ranze

My aunt always used to tell me, “you can’t control the cards you’re dealt. You can only control the way you play the game.” When it comes to investing, the same is true. You can’t change what the market is doing. You can only control the way you manage your cards, or in this case, investments. The problem with that is sometimes our need to do something could cost us.

When markets take a dive, it’s natural to feel an immediate sense of panic. We see our portfolios dropping and our hard-earned savings seemingly evaporating before our eyes, and we can’t help but feel overwhelmed and scared.

According to a MagnifyMoney survey, 42% of Americans sold at least one stock as a response to the pandemic in March 2020. While some wanted cash on hand in case of a recession, 35% feared a market crash.

Why did this happen? Emotions ran high and so did losses. Was it panic? Inexperience?

In this article, I’ll break down why we freak out with market fluctuations and why this money anxiety could be costing us.

When it comes to investing, it’s important to keep in mind that market fluctuations are normal. In the short term, markets can move suddenly in either direction. The long view on the market tells a different story, and this is reflected in the way people with more experience in the market behave while investing.

The percentage of people who sold during the market dip varied significantly based on their age.

While 64% of Gen X and 43% of millennials sold assets, only 10% of baby boomers sold stock. Seasoned investors have experienced bear markets and the eventual rebounds. After all, over time, the stock market has always gone up. Newer investors, on the other hand, may not have that experience and may be prone to bail at the first sign of trouble.

Two women are sitting with their backs to the camera as they look at a sunset over trees and a city skyline. Overlaid words read, "How Stress Impacts Spending, Saving & Investing." Read button links to the article How Stress Impacts Spending, Saving & Investing.

So if you’re feeling nervous about the current market conditions, take some time to reassess your investing goals and strategies.

Are you investing for the short term or the long term?
What’s your risk tolerance?
And most importantly, are you confident in your investment plan?

If you’re feeling good about your plan and still want to invest, don’t let short-term market fluctuations scare you off. Instead, it might be time to practice one of our favorite money mindset techniques: reframing. Think of these lows as an opportunity to buy stocks at a discounted price. Just be sure to keep your eye on the long game, and avoid responding to day-to-day market movements by assessing your feelings before making any changes to your portfolio.

Assess your feelings

It’s no secret that investing can be a stressful process. Agonizing over whether to pull out of a stock before it tanks can cause all sorts of negative emotions.

But did you know that those emotions can actually have a negative impact on your investments? Here are just a few ways that stress and feelings can mess with your money:

1. You might make impulsive decisions.

When you’re feeling stressed or emotional, it can be tough to make rational decisions. You might end up investing in stocks that you know are risky, or selling off your assets at a loss just to try and ease your stress.

2. You might not be able to focus.

Anxious thoughts can often lead to distractions and a lack of focus. This can make it difficult to pay attention to your portfolio and make the best choices for your money.

3. You might take too much risk.

When you’re feeling stressed or emotional, it’s easy to make snap decisions without thinking things through. This can lead to investing in high-risk stocks, pulling out of the market at the wrong time, or investing more money than you can afford to lose.

Could stress be costing you

Is your social media feed filling you with dread or anxiety about current events? Stress triggers a couple of tendencies that impact investing in a few ways. It’s important to understand how your feelings can impact your investment behavior to avoid bad financial outcomes.

Loss aversion

Loss aversion is a cognitive bias that describes the tendency of people to strongly prefer avoiding losses to acquiring gains. In other words, people are more likely to take risks to avoid a loss than to achieve a gain.

Loss aversion is thought to be one of the primary reasons why people are reluctant to invest their money. In this podcast episode, Kevin Matthews of Building Bread, explains why his uncle avoids investing for decades. After all, the fear of losing money is a powerful motivator. However, loss aversion can also lead people to panic selling and holding on to losing investments for too long, in the hope of recouping their losses.

Base Rate Neglect

Base rate neglect is the tendency to judge the probability of something happening based on new, easily accessible information while ignoring original assumptions. When you made your investments, you assumed it would appreciate over time. When your Twitter field is flooded with information about Russia invading Ukraine, it may trigger an overreaction to new information resulting in overselling based on bad news. (To be fair, the inverse also occurs. Think the piling on based on good news like a Covid-19 vaccine.)

Panic selling locks in your losses, since pulling out of your investments during a decline can make it tougher to recover when the market eventually rebounds, as they did shortly after the March 2020 downturn.

Why you should avoid panic selling

When we allow our emotions to take over, we can make poor investing decisions. We might sell our stocks when we should be holding on, or buy into a stock when we should be selling.

It’s important to stay calm and rational when investing, and to make decisions based on sound financial planning rather than our emotions. By doing so, we can protect our investments and ensure that we’re making the most of our money.

Locking in losses

Panic uncertainty locks in your losses since pulling out of your investments during a decline can make it tougher to recover when the market eventually rebounds as it did shortly after the March 2020 downturn.

Don’t let yourself feel panicked or anxious when the markets take a dive – instead, stay focused on your long-term strategy. Remember, over time, the stock market has always gone up.

How to avoid letting your feelings impact your investment

Schedule worry time daily. During this time, take a moment to write down and reflect on all of the things stressing you out. Once you are done, tell yourself to let go of those thoughts until your next designated worry time.

With the Nav.it Money app, we build in daily Mindset check-ins so you can reflect on how stressed you are and what is causing that stress.

How to overcome natural tendencies

Fortunately, there are ways to overcome loss aversion and other natural tendencies with investing. One way is to focus on the long-term potential of your investment, rather than the short-term fluctuations. Another way is to diversify your investment portfolio, so that you are not overly reliant on any one investment. Finally, it is important to have realistic expectations about investment returns. If you expect to make large profits every year, you are likely to be disappointed – and this could lead to loss aversion.