Understanding our natural instincts and mental “blind spots” can help us avoid emotionally driven decisions that can damage our long-term success as investors, while helping us enjoy a smoother road to financial success.

Imagine this: You wake up one morning and check your portfolio. The market has dropped 15% overnight due to global uncertainty. Your first instinct? Sell everything and protect what's left. It's a perfectly natural human response. For long-term investors, however, it's often the very kind of move that can undermine a carefully constructed financial plan.

Here's the fascinating truth: it’s not your fault. Our brains are magnificently designed for survival, but weren't necessarily built with stock markets in mind. The same psychological wiring that kept our ancestors alive on the savanna can sometimes work against our financial futures. Understanding these mental patterns isn't just intriguing psychology – it's essential for building lasting wealth.

Blame it on your DNA – the evolutionary quirk in your investment strategy

Recent behavioural finance research reveals a telling reality: the average equity investor's portfolio underperformed the S&P 500 Index by a significant 8.48% in 2024.¹ That's not a typo. Despite having access to more information and analytical tools than ever before, many investors consistently make decisions that compromise their long-term success.

Why does this happen? Because evolution didn't prepare us for financial markets.

Consider loss aversion – the well-documented tendency for people to feel the pain of losses roughly twice as intensely as the pleasure of equivalent gains.² This psychological trait made perfect sense when losing your winter food stores meant death. But in investing, it often leads to holding losing positions too long while selling winners too early – the exact opposite of what successful long-term investing requires.

Our tribal nature also plays a role. Herd mentality – closely related to the more modern idea of FOMO or Fear Of Missing Out – which drove our ancestors to safety in numbers, can be a liability in financial markets wherein following the crowd typically means buying high and selling low.³ The "meme stock manias" and crypto volatility of recent years perfectly illustrate markets driven more by emotion and social media sentiment than fundamentals.²

Finally, there's our relationship with time. Our brains excel at responding to immediate threats and rewards, but struggle with long-term thinking. The combination of loss aversion and narrow framing – focusing on individual investment outcomes rather than overall portfolio performance – creates what Nobel laureate psychologist Daniel Kahneman calls a "costly curse."⁴ We check our portfolios frequently, reacting to daily fluctuations that have little bearing on our 20-year-plus goals.

A disciplined framework for the more “evolved” investor

Fortunately, recognizing these patterns is the first step toward overcoming them. The path to financial success, despite our psychological tendencies, involves three crucial elements:

• Step 1: Recognize your patterns

Awareness is powerful. Once you understand that overconfidence (i.e., overestimating our knowledge and abilities, particularly during bull markets) can lead to excessive trading,² that recency bias (i.e., overweighting or overestimating the importance of recent news or developments) makes you overreact to recent news,² and that confirmation bias keeps you seeking information that confirms existing beliefs while ignoring anything that does not,² you can begin to pause in those crucial moments.

Ask yourself: Is this decision based on solid analysis or emotional reaction? Am I following the crowd simply because others are? Does this align with my long-term goals, or am I reacting to short-term market noise?

• Step 2: Create a plan that reflects your reality

A comprehensive wealth plan that aligns with your unique circumstances, goals, risk tolerance, and, ultimately, your risk profile, serves as your most effective tool against emotional decision-making.⁵ Your wealth plan isn't a generic allocation model – it's a personalized roadmap that considers your timeline, income needs, family situation, and emotional capacity for volatility.

Your plan includes specific triggers for rebalancing, clear criteria for evaluating investments, and predetermined responses to market volatility. When markets experience turbulence, you're not making decisions in the heat of the moment – you're following the strategy you developed with clear judgment.

We encourage you to contact your Investment Counsellor today to discuss the benefits of having a wealth plan, or to refresh your existing wealth plan if your life or financial circumstances, and/or goals, have changed significantly in the recent past.

• Step 3: Build your system of accountability

This is where the true value of professional investment management becomes evident. Research consistently shows that investors working with advisors achieve better long-term outcomes than those managing portfolios independently.⁶ The reason extends beyond portfolio construction – advisors serve as behavioral coaches, helping to bridge the gap between impulse and strategy.

The power of partnership

Your Investment Counsellor (IC)'s role is multifaceted, involving not only their expertise in portfolio management, but in understanding you and what matters to you and your family. They are there to remind you of your long-term objectives when fear suggests otherwise. They maintain the discipline to rebalance (or not) when it feels counterintuitive. Most importantly, they base decisions on data and your established plan, not the emotional swings of daily market movements.

This disciplined approach is the core of our discretionary portfolio management (i.e., where you empower your IC to make the buying, selling and holding decisions for your portfolio based on your pre-existing investment strategy, their expertise, and their knowledge of you) RBC PH&N Investment Counsel clients benefit from. It empowers your IC to make timely adjustments based on your strategy – not emotion – allowing you to focus on what matters most in your life.⁶ When opportunities arise or risks emerge, your IC can act decisively within your predetermined parameters, keeping you on track to your goals – and away from the perils of veering off of it.

The “evolved” path forward

Your mind will always be wired for survival, not investing. The concern when markets decline, the excitement when they surge, the pull to follow the crowd – these aren't character flaws, they're part of being human.

The difference between investment success and disappointment often comes down to having systems that account for these very human tendencies. This means working with professionals who understand both markets and human psychology, maintaining a plan designed for your specific circumstances, and having the discipline to follow that plan when instincts suggest otherwise.

The next time market volatility strikes – and it will – remember that your immediate reaction might not serve your long-term interests. Take a breath and consult your wealth plan. Then, reach out to your IC. That conversation is the most critical part of the system you've built to navigate not just market turbulence, but the far more challenging territory of our own emotional responses.

After all, the greatest risk to your financial future often lies not in the markets themselves, but in decisions made from emotion instead of strategy.

Sources

1. DigiFinTechCrunch. "Behavioral Finance: Understanding Investor Psychology in 2025." https://digifintechcrunch.com/behavioral-finance-understanding-investor-psychology-in-2025
2. Boston Institute of Analytics. "Behavioral Finance in 2025: How Psychology is Driving Market Trends." https://bostoninstituteofanalytics.org/blog/behavioral-finance-in-2025-how-psychology-is-driving-market-trends/
3. The Data Scientist. "Why Smart Investing in 2025 Starts with Market Psychology." https://thedatascientist.com/why-smart-investing-in-2025-starts-with-market-psychology/
4. Forbes Finance Council. "Mind Over Money: How Behavioral Finance Shapes Investment Decisions." May 2, 2024. https://www.forbes.com/councils/forbesfinancecouncil/2024/05/02/mind-over-money-how-behavioral-finance-shapes-investment-decisions/
5. WQ Corporation. "Avoid Emotional Investing: 4 Strategies for Smarter Decision Making in 2025." https://www.wqcorp.com/blog/avoid-emotional-investing-4-strategies-for-smarter-decision-making-in-2025
6. Natixis Investment Managers. "2024 Financial Professionals Report." https://www.im.natixis.com/en-gb/insights/investor-sentiment/2024/financial-professionals-report

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