Behavioral Finance: Why People Overreact to the Market

Last year when the market tumbled at the beginning of the COVID-19 pandemic, many people were understandably nervous about the future.  Unfortunately, I know some people reacted to the media and abandoned their plans.  One person I know decided one week after the market bottomed out in March 2020 to sell out of all their stock holdings.  They thought it would be safer to sit on the sidelines.  However, whenever a person decides to sit on the sidelines during market turmoil, they typically wait until the market has recovered to get back in.  This locks in losses and generally means you lose out on much of the recovery.

Looking back to the person who decided to sell one week after the market bottom, this pattern played out precisely.  Looking just at the S&P 500 during this time period, they locked in a loss of over 30% from the beginning of the year. They waited until the market climbed over 70% from the bottom before buying back.  Not only did they lock in losses, they missed out on the rebound gains and purchased at a price point higher than the beginning of the year.

Ignore the media and stick to your plan.

This is a good reminder to ignore the media and stick to your plan.  While you cannot prevent losses, you can be prepared for them.  A solid financial plan should account for the inevitable ups and downs of the market.  And a financial advisor can be a coach to help you make sound decisions no matter what is happening in the market.  Working with a CERTIFIED FINANCIAL PLANNER™ can help you keep your focus and make choices that are in your long-term financial interests.