Investment discipline is all about being able to see past the daily market distractions to maintain a long-term perspective. A big challenge here is knowing how to identify and ignore your own emotional investing biases. They can otherwise stir up excessive anxiety about the future. They can also trick you into chasing the latest fads, or otherwise veering from your true financial aim. What can you do about them? Read on.
In “Emotional Investing Is Risky Investing,” we explored how a number of deep-seated “fight or flight” instincts generate an array of behavioral biases that trick us into losing our investment discipline, which in turn can trigger significant money-management mistakes. Here, we’ll familiarize you with six of the most potent biases, and how you can avoid sabotaging your own best-laid investment plans by recognizing these biases when they’re happening to you.
Market Ups and Downs: Par for the Course
Let’s pull back the curtain on why market turbulence is so common. The stock market is essentially the world’s largest group project, with millions of investors constantly buying and selling based on their rapidly changing outlooks, economic news, Fed decisions, corporate results, or even a rogue tweet from someone named Elon.
This constant push and pull means that periods of gains, losses, and stretches of outright weirdness aren’t an error in your investment story—they’re basically the plot. Some years, optimism surges and prices climb. Other times, bad headlines or economic slowdowns can make the ride bumpy. But here’s the thing: Even though these twists can rattle our nerves, they’re all part of the market’s normal rhythm.
By expecting—and accepting—these moves, you’re far less likely to get thrown off course. When you remember that volatility is woven into the market’s fabric, it becomes easier to keep your cool, stick to your plan, and avoid those kneejerk decisions that typically do more harm than good.
What Are the Key Elements of a Successful Investment Strategy?
A successful investment strategy isn’t about picking this year’s darling stock or dodging every bump in the market. Instead, it starts with recognizing that both ups and downs are part of the investing journey. It’s crucial to expect periods of growth, stretches of decline, and even wild swings—none of which should throw you off course if you’re prepared.
Here are the essentials for keeping your plan on solid ground:
Stay the Course: Discipline means resisting the urge to jump in and out of the market based on headlines or gut feelings. Your approach should be handed the steering wheel—not your emotions.
Rebalance Regularly: Markets will tug your portfolio off target from time to time. By periodically rebalancing to your intended mix of investments, you’re taking advantage of natural market movements rather than letting them take advantage of you.
Avoid the Hype: It’s tempting to chase after “sure things” or panic in the face of bad news. In reality, buying hot stocks just because they’re trending—or bailing at the first sign of trouble—can set you back far more than sticking to your plan ever will.
Keep Contributing: Continually adding to your investments, even—or especially—when it feels most uncomfortable, can deliver surprising long-term results. Think of it as buying more shares when the price is right.
Stick to the Fundamentals: Anchoring your strategy on sound, long-term financial principles will help you remain focused on your goals, regardless of the daily noise.
With these core practices, you can stay grounded through the inevitable ups and downs, avoiding costly detours and keeping your investments pointed toward your true long-term objectives.
Behavioral Bias #1: Herd Mentality
Herd mentality is what happens to you when you see a market movement, and you decide to join the stampede. The herd may be hurtling toward what seems like a hot stock market run. Or it may be fleeing a widely feared risk. Either way, as we covered in “Understanding How Markets Work for You,” following the herd puts you on a dangerous path toward buying high, selling low, and incurring unnecessary expenses along the way.
The High Cost of Missing the Market’s Best Days
Let’s put some numbers behind why staying invested is so critical, even (or especially) when it feels counterintuitive. Imagine you’d put $1,000 into the S&P 500 back in 1970 and simply let it ride the waves of the market’s ups and downs, without flinching. Over the next five decades, despite every bit of volatility—from 1970’s disco days to 2020’s pandemic turmoil—that patient approach could have grown your original investment to more than $120,000.
But here’s where emotional decision-making trips up so many investors: reacting to short-term market drops by pulling out, with the intention of getting back in “at the right time.” Unfortunately, a handful of the stock market’s most spectacular growth days tend to happen right after its worst crashes—think of the rollercoaster rebounds right after 2008 or March 2020.
If you missed just the best five days in that entire 50-year stretch, your return doesn’t just dip a little—it gets slashed by more than a third. Skip the 15 best days? You’ve just given up nearly two-thirds of your potential gains. Miss out on the top 25 trading days and over three-quarters of your possible growth simply evaporates.
The lesson? Your long-term results hinge far less on perfectly timing your moves and far more on simply staying the course. Trying to outsmart the market with hasty decisions is rarely a winning strategy and puts your financial goals squarely at risk.
Behavioral Bias #2: Recency
Your investment discipline is also at risk if you give recent information greater weight than the long-term evidence warrants. From our earlier post, “What Really Drives Higher Expected Returns,” we know that stocks have historically delivered premium returns over bonds. And yet, whenever stock markets dip downward, we typically see recency bias at play, with droves of investors rushing to sell out of the market in search of “safe harbor.” On the flip side, the same bias spurs investors to pile back in when bull markets are on a tear (when many stocks are already overpriced).
Behavioral Bias #3: Confirmation Bias
Confirmation bias is the tendency to favor evidence that supports our beliefs, and to disregard that which refutes them. We’ll notice and watch news shows that confirm our belief structure; we’ll skip over those that would require us to radically change our views if we are proven wrong.
Confirmation bias explains why the rigorous, peer-reviewed approach we described in this earlier post is so critical to objective decision-making. Our mind want us to be right so badly, it will rig the game for us, even when it’s against our best financial interests.
Behavioral Bias #4: Overconfidence
In “Your Money & Your Brain,” Jason Zweig describes overconfidence in action when he asks: “How else could we ever get up the nerve to ask somebody out on a date, go on a job interview, or compete in a sport?” In these and similar scenarios, a degree of overconfidence can be beneficial. But in the financial arena, it often puts our investment discipline at risk. It tricks us into believing we can consistently beat the market by being smarter or luckier than average. In reality, as we described in an earlier post, it’s best to patiently participate in the market’s expected returns, instead of trying to go for broke – potentially literally.
Behavioral Bias #5: Loss Aversion
The opposite of overconfidence, we also have an oversized dose of loss aversion. The thought of losing money hurts significantly more than the prospect of gaining it excites us. As Zweig states, “Doing anything – or even thinking about doing anything – that could lead to an inescapable loss is extremely painful.”
One way that loss aversion attacks your investment discipline is by convincing you to flee to cash or bonds during bear markets – or even when stocks are going up, but a correction “feels” overdue. The evidence clearly demonstrates: You should end up with higher long-term returns by consistently holding, if not bulking up on stocks over time. And yet, even the potential for a future loss can impact your decision-making more than the likelihood of long-term returns.
Behavioral Bias #6: Sunken Costs
We investors also have a terrible time admitting defeat. When we buy an investment and it sinks lower, we tell ourselves we don’t want to sell until it’s at least back to what we paid. This sort of sunken-cost logic leads people to throw good money after bad. Do you find it difficult to let go of past losses once a position no longer suits your investment plan? That may suggest your investment discipline has become hobbled by emotional choices and debilitating distractions.
How Asset Allocation and Rebalancing Foster Investment Discipline
So, how do you keep your investment discipline in check amid all these sneaky biases? Enter asset allocation and portfolio rebalancing—two time-tested techniques to help you stay anchored.
Asset allocation is your tool for spreading your investments across stocks, bonds, and other asset classes in a way that matches your long-term objectives and appetite for risk—essentially, the grown-up version of not putting all your eggs in one basket. By setting a clear plan upfront, you avoid the temptation to chase hot trends or panic-sell when markets look shaky.
But that’s only half the battle. Over time, as markets shift and some holdings outperform others, your portfolio can get lopsided—like a see-saw with all the kids on one side. Portfolio rebalancing is the simple, albeit emotionally challenging, act of bringing your investments back in line with your original allocation. It might mean trimming investments that have soared and adding to those that have lagged (which sometimes feels counterintuitive). But research—from the likes of Vanguard and Morningstar—shows this systematic approach can help you “buy low and sell high,” rather than following your feelings into costly mistakes.
In short, a disciplined mix of asset allocation and regular rebalancing acts as your financial autopilot—helping you sidestep impulsive moves and keeping you focused on reaching your long-term goals.
Your Take-Home for Investment Discipline
So, there you have it. Six behavioral biases, with many more worth exploring in Zweig’s and others’ books on emotional investing. It’s not only a fascinating field of inquiry, it can help you strengthen your investment discipline muscles. As a bonus, the insights are likely to enhance other aspects of your life as well.
But be forewarned. Even once you’re aware of your behavioral biases, it can still be hard to ignore them. They tend to fire off lightning-fast reactions in your brain well before your logic has any say. That’s why we suggest working with an objective advisor, to help you see and avoid collisions with yourself that your own myopic vision might miss.
To see all 10 principles of Evidence-Based Investing at a glance, please visit our Evidence-Based Principles Guide. These principles inform our investing process.