The renowned scientist and thinker got caught up, at least to a modest extent, in the South Sea Bubble of 1720. He made an initial investment and then saw his financial position soar in value. Feeling vindicated, he reinvested into the British joint-stock company at the bubble’s peak. Once it burst, he reportedly lost up to 90% of a £22,000 stake, the equivalent of more than $4 million today.1
Newton later reflected, "I can calculate the movement of the stars, but not the madness of men." This anecdote illustrates that even genius is no match for the power of emotions in investing.
The English polymath’s foray into investing didn’t go well in that instance. Perhaps you’ve had a similar experience. It’s normal, particularly during booms and busts, to let your feelings drive portfolio decisions.
The fear of missing out (FOMO) during bull markets causes people to stray from a grounded asset allocation and long-term financial plan. Amid bear markets, the anxiety that comes with seeing your account balance drop in value each week is disheartening for some and soul-crushing for others.
Why does this happen? There are myriad reasons, but among the leading contributors is loss aversion. Behavioral finance research consistently shows that investors feel the pain of losses about twice as intensely as they experience the pleasure of equivalent gains. It’s most common to consider loss aversion when the market is crashing—think 2000, 2008, and March 2020. Panic-selling results in a “flight to safety” in markets in which cash becomes king and Treasuries are the ultimate safe haven. Hiding under the warm blanket of cash for too long will undoubtedly threaten long-term financial success.
But loss aversion isn’t limited to fear: It can make investors shoot for the moon to keep up with other investors’ perceived success. This is when FOMO enters the scene. Emotions might drive those seeking risk to over-trade their accounts, which usually only benefits the broker and the tax man. According to researchers at the University of California, Davis, active traders generated an annual return that was 6.5 percentage points below the market’s.2
So, during bull markets, the urge to act, even when unnecessary, was directly tied to worse outcomes. Moreover, in What Investors Really Want, Meir Statman noted, “Across 19 major stock exchanges, investors who made frequent changes trailed buy-and-hold investors by 1.5% a year.”3
To prevent committing such follies as Newton’s, try these three strategies to keep your wits about you when the animal spirits make their presence known:
- Revisit Your Long-Term Plan
A financial plan is a roadmap to help you navigate both changing circumstances in your life and uncertainties in the market. A methodical approach to portfolio management helps ensure emotions don’t cause costly financial accidents. - Remind Yourself that Diversification Is Smart and Prudent
For some investors, investing across asset classes, sectors, and geographies can help manage risk while still accessing hot market niches and themes. - Reflect on Your Emotions
It’s important to acknowledge—not suppress—your emotions. Fear and greed are real; the key is not always acting on them. By taking time to reflect on why you invest and reminding yourself what your financial goals are, you can better stay in control.
The Bottom Line: Emotions are part of investing, but they don’t have to dictate results. With a clear plan, awareness, and the right mindset, you can sidestep the costly mistakes that come from fear and greed and focus instead on long-term success.