How to avoid emotional investing in market downturns

Amid an ongoing market downturn, many individuals may be prone to emotional investing. Michael Liersch, Wells Fargo head of advice and planning, joins Wealth! to discuss strategies for avoiding emotionally-charged decisions during this period.

Liersch notes that market downturns can lead to "doom-scrolling," or individuals constantly checking their accounts. This behavior typically results in three main reactions: risk aversion, where people feel the need to eliminate uncertainty; action bias, which creates an urge to de-risk; and "herd-following," where one person's actions quickly lead to a "global phenomenon" of others following suit.

To refrain from emotional investments, Liersch advises three key strategies. First, ensure you have a collaborator to "help keep you in check." Second, constantly review and reassess your financial goals. Lastly, create a comprehensive plan, emphasizing that "you don't want to be making decisions in the absence of a plan."

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Angel Smith

Video Transcript

Well, if you opened up your investment accounts yesterday, your height, your heart may have skipped a beat as the dow tumbled over 1000 points as part of a global market sell off.

And if that freaked out, well, maybe you panicked and made decisions based on fear and emotion.

But here to dig into the ecology psychology of money during a downturn and to talk about what people tend to do during these time periods, we've got Michael Lear who is the head of advice and planning at Wells Fargo.

Michael.

Thanks so much for hopping on with us here.

Ok.

So let's just talk about the psychology that people go through when they hear information or they first see kind of these jolting numbers that pop up on screen about where the market is poised to open up and then what's actually happening during the trading session and then the broader context of it all.

So it's interesting that you highlight this because the broader behavior that you typically see is something called doom scrolling.

And I'm, I'm sure you're familiar with that.

As are many of your viewers which to your point.

You go, you look at your accounts and you just keep going back and looking how much have they fallen, how much have they fallen.

And typically, that leads to three types of behaviors.

The first is what we call in behavioral science, risk aversion.

And that is really this aversion to uncertain.

So human beings are uncertainty reduction machines.

We want to eliminate uncertainty in our lives, which is ironic because it's uncertainty that actually gives us that, you know, think of it as value in the market because we've taken that risk and that risk is paid off.

So typically that leads to something called action bias, which means you want to derisk and you saw that a lot in the markets in the last couple of days loss, aversion is another one that comes up, which is a fear of loss.

So in behavioral science terms, losses hurt twice as much as the equivalent game feels good.

So human beings don't like to lose.

So what we do is we try to find, think of it as investments are ways to park our money that don't lead to at least immediate losses.

And the last one that I would highlight that is really systemic in times like this.

And, and you heard it in the in the former uh segment, which is this idea of herd following.

So once one person does something, then another person does it and then it can become a global phenomenon quite quickly.

And so when you think of that herd following.

It's really important to be introspective and say now a herd that I'm following, are they on my time horizon?

Are they really, really executing on the trades that matter?

Most to me, when I link them back to my goals, in terms of what I'm trying to accomplish financially speaking.

So you really have to ask yourself some critical questions before you start following that herd.

What are, what are the ways to keep your decision making in check?

Knowing that these are the tendencies that might come about naturally just as part of our psychological or, you know, just the pathway of thinking.

So three things that I would highlight the first is to keep yourself in check.

It's always critical to have a collaborator and ideally a human one.

So whether that's, you know, a colleague, a spouse or partner, a professional, they can help keep you in check and make sure that you're not making think of it as overreactive decisions based on your gut.

And it's really in line with your goals.

The, the second piece that I would really highlight is that you have to go back to what you're accomplishing.

So name that goal.

Are you trying to grow your money?

Are you trying to save or invest for something specifically a big purchase, a home, whatever that might be and really think about the time period and the dollar amount that you're targeting and whether you're really in a good place to get there.

And the last thing I mentioned is really make a plan.

You don't want to be making decisions in the absence of a plan.

So if you made a plan and you feel like you're still on track to achieve that plan and you have enough, stick with it.

If you don't have enough, then you may want to make some strategic changes or some tactical changes in order to get there in a think of it as more certain way because we are all that uncertainty reduction machine at the end of the day.

Certainly, you know, just lastly while we have you here, Michael, I mean, different generations of investors have experienced different shocks in the market.

I is there a way that you're seeing psychology differ across generations with more events that we continue to navigate through?

Absolutely.

So there's a key one which is as you well know, younger investors tend to really interact more on their mobile devices, whereas older investors tend to interact more either with a human or on their desktops.

And that actually is research that has shown that mobile devices create more of an act bias than a desktop or a human being might.

So it's something to keep as a major watch item as you're entering markets uh and uncertain ones, you know, where are you really leaning into your mobile device ver versus other forms of making these types of investment decisions and really take a step back.

Take a pause, you know, our mobile devices, we like to text, then we like to do things that are very media, scroll, social media videos, but that's not how we should be making an investment decision.

So just keep it as a watch item.

You mean a meme shouldn't be the core focus of my investment decision making, Michael?

My goodness.

Come on now, Michael Lear, she was the head of advice and planning over at Wells Fargo.

The memes are fun sometimes though Michael, we gotta admit that.

Appreciate it.

Thanks so much for taking the time.

Certainly.