Panicking About Market Volatility? Don’t Lose Money Chasing the Crowd

Investing can be hard during a week like this.

And it can be made even harder by the chatter of others. Although my job is to help others avoid costly behavioral mistakes, I felt drawn into the panic that many were feeling with Monday’s stock market selloff.

You’re not alone in feeling swayed by others during the downs of the market, but these decisions can be costly. Return-chasing—investing more in an asset when returns have been good and taking money out when returns have been bad—has been found to reduce the long-term returns an investor sees compared with those who did not chase returns.

So, why is it so easy to make this mistake, even when you know it’s the exact opposite of what you should do? In short, because you’re only human.

The Behavioral Biases Behind Counterintuitive Decisions

Humans are social creatures. Most of the time, this is our superpower. Imagine trying to build a city, or even just a shed, entirely on your own. And building it without any tools invented by another person, any materials sourced by somebody else, or any knowledge acquired by any method other than your own trial and error.

You probably wouldn’t get far.

Our tendency to pay attention to and learn from others has allowed humans to do incredible things. However, this can also lead us astray, because it makes us prone to herding behavior.

Herding behavior is when we feel compelled to act in a way that lines up with what others are doing, even if it’s not what we would typically do. When an investment is on the way up, herding behavior is what undergirds FOMO; when it’s on the way down, herding behavior encourages panic selling. It is, in essence, what your mother was talking about when she asked if you would jump off a cliff if all your friends were doing it.

Other cognitive biases can further encourage return-chasing.

For example, when we see a stock enjoy a meteoric rise, we might assume the stock will continue to do well without considering other important factors. This is caused by our tendency to focus on recent events (availability heuristic). Or loss aversion, the acute sense of pain we feel when losing money, may lead us to counterproductively decide to sell holdings when they are down and lock in losses.

3 Tips for Learning to Stand on Your Own

It can be hard to resist the crowd. Yet, knowing what you want and setting behavioral guardrails can help weaken the pull of others’ frenzy.

These three tactics can help you offset panic:

1. Know your goals. We are always investing for a reason, but you need to know what you are investing for more specifically than just “the future.” Well-articulated and meaningful goals help people stay motivated and committed to their goals. So, what does that future you’re investing in look like? Take time to articulate your goals. You can use tools to work through them on your own or get help from a financial advisor. When bad days in the market crop up, bring your focus back to these goals and resolve to stay committed to the plan you developed to make them a reality.
2. Automate your good investment decisions. It can be hard to consistently decide to put money into the market when it’s down and not to jump ship. By automating the investments you’ve already vetted, you can make the right decision for the version of you who must deal with worrisome days in the market. This way, it’s easier to ignore the pulls of the crowd and let automation do the work for you.
3. Know how to step away. Constantly watching what others are doing can spike the desire to go with the herd. Limit yourself. This might look like setting lockout timers on apps, reading market news just once a week, or checking your portfolio only when you’re meeting with your financial advisor. You may even have to direct conversations away from the topic. You can’t follow the herd if you don’t know where it’s going.

There are times when getting swept up with the crowd can be good—think of the fun you can have at a concert or sporting event. But when it comes to investing, you can resist this costly urge by knowing what you want and what you need to do to get there successfully.