Emotional Investing: What It Costs, and What to Do About It

It gets expensive when investors sell during downturns, research shows.

Steve Wendel 1 October, 2021 | 2:54AM
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Worried Person

I recently analyzed the costs and implications of selling investments during downturns. By my estimates, and others in the field, the cost to everyday investors is on the order of 100 to 150 basis points, annualized. Even if you aren't likely to panic during a downturn yourself, though, the potential for panic by others affects your investment environment because of how the risk of emotional selling is built into common practice in asset allocation. Let's take a look at that research, and what it means for investors and investing. 

By focusing one's asset allocation squarely on one’s goals and what is needed to achieve them, and using behavioral tools to mitigate emotional challenges, we can find a more effective answer than current risk-preference based allocations.

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About Author

Steve Wendel

Steve Wendel  Steve Wendel is head of behavioral science for Morningstar, where he leads a team of behavioral scientists and practitioners who conduct original research to help people invest and manage their money more effectively.

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