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How to stay invested in volatile markets

Key takeaways

  • Humans tend to have built-in biases that can guide their financial choices.
  • We tend to be overly focused on the potential dangers in situations, which can sometimes make us perceive things as riskier than they actually may be.
  • Understanding why investing can make you feel a certain way may help you build healthier financial habits.

When markets are volatile, many investors find the same questions running through their minds. It seems like the market will keep going down; should I still be investing in stocks? Can I really trust my investment plan to help me reach my goals? Wouldn't my assets be better off in something safer, like cash?

It's understandable that many investors feel anxious about turbulent markets, says Melissa Knoll, vice president of behavioral science at Fidelity, even if they acknowledge that dips are likely temporary. As humans, we are hyper-focused on steering clear of danger, a phenomenon known as negativity bias. That tendency to focus on the negative aspects of a situation, research has suggested, may be hardwired.

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Your brain and market volatility

"When our ancestors were living in caves and there were literally lions around the corner, focusing on dangers and how to avoid them made sense," says Nathan Young, a behavioral research scientist at Fidelity. "But for a modern-day investor, this may make it harder to cultivate healthy investing habits."

Especially since most of us aren't experts at managing money, our decisions around investing may tend to be guided by these same biases. But when markets are volatile, your innate reactions may encourage you to sit on the sidelines or even cash out altogether—causing you to potentially miss out on opportunities and undermine your portfolio's long-term growth potential.

Here are 3 reasons you may be struggling to stay invested now—and how you can notice your own biases and emotional triggers, helping you make decisions guided by your long-term plan, not short-term anxiety.

1. We dislike losses more than we enjoy gains

Finding a $10 bill on the street or losing $10 should make us equally happy or sad. But studies exploring a phenomenon called "loss aversion" demonstrate that losses hurt more than equivalent gains make you feel good.1

When it comes to your investments, the pain of any losses you've had over the past year can overshadow your appreciation for the strong market performance seen over the past decade. "If you're checking your portfolio frequently, you may be experiencing what's known as myopic loss aversion, where seeing loss after loss compounds your negative feelings and takes away from the positive feeling of the gains," says Young.

Loss aversion has also been used to help explain something called the "disposition effect," which describes a tendency for investors to hold onto investments that have lost money and sell those that have increased in value.2 The idea is that we don't want to accept the fact that we have lost money on an investment, which tends to make us want to hold onto it even when it may be best to move on.

2. Uncertainty is uncomfortable

Say you were offered a choice between opening an envelope that your know contains a $50 bill or choosing between 2 sealed envelopes—one that offered $100 and one that contained nothing.

In theory, the probability of coming away with $50 with each of these options is equal. Yet in experiments, people tend to opt for the sure thing, because of our natural tendency to avoid ambiguity.3 "Risks that feel more certain or known feel better to us than risks that are unknown," Knoll explains.

Most investors know that it's important to take on some level of risk in order to potentially enhance their long-term returns. But when markets are turbulent, our tendency to back away from uncertain situations can often prevail. "Right now the market feels extra ambiguous to some people, so cash might feel like the more reassuring option," says Knoll. "Some people may feel more comfortable choosing an option when they know what they're getting, even if their long-term gains will likely be smaller."

3. We value today's dollars more than future dollars

In one study, people were asked: Would you rather have $700 today—or $1000 a year from now? The majority of people opted for the immediate payout, even though in doing so, they would be forfeiting a 30% return on the money.4

We tend to make that choice due to a phenomenon known as "present bias," which leads us to overweight the importance of our current state compared to a future one. "We value dollars today more than dollars in the future," Knoll says. But, thanks to compound interest and potential returns on our investments, dollars in the future may very well be worth more than dollars in the present.

Present bias creates a tendency for us to "live for today" instead of sticking to a disciplined route that might benefit our future selves. For example, if we're choosing between a brownie and an apple for dessert, we tend to pick the choice that makes our current self happy (the brownie) instead of keeping our future self healthy (the apple). When it comes to money decisions, present bias makes it more tempting to spend our earnings and enjoy the money today, and harder for us to save and invest for a future time. "Sticking to an investing plan is already naturally hard for us—and when markets are volatile, it gets even harder," says Knoll.

Recognize your emotions and decision biases

It can be hard—but not impossible—to regulate your feelings around investing. The first step: recognizing how your investing decisions are informed by your biases. Fidelity's Money Mindset quiz can help.

Once you're more self aware, consider these tips:

Look less frequently. Research has found that investors who check their portfolios frequently are less willing to accept risk, and over the long run may reduce their returns. 5

Consider sources of safety. You may rest easier knowing that some of your assets are protected from stock market risk. That includes emergency savings with 3 to 6 months' worth of essential expenses and foundational estate planning pieces like life and disability insurance.

Don't go it alone. Automatic investing, such as with a 401(k), can help you keep investing on a regular cadence, no matter what is happening in the market. You can also consider a professionally managed account, which can help you stick to a disciplined process of investing and help you maintain a diversified portfolio of investments.

1. Kahneman, D., & Tversky, Econometrica. A. Prospect Theory. An Analysis of Decision Making Under Risk, 1977.

2. Shefrin and Statman, The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence; The Journal of Finance, 1985.

3. Ellsberg: Risk, Ambiguity, and the Savage Axioms. The Quarterly Journal of Economics, 1961.

4. O'Donoghue, T., & Rabin, M.: Doing it now or later. American Economic Review, 1999.

5. Richard H. Thaler, Amos Tversky, Daniel Kahneman and Alan Schwartz, The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test. The Quarterly Journal of Economics, 1997.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Diversification does not ensure a profit or guarantee against loss.

Investing involves risk, including risk of loss.

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