Busey Bank | Fear vs. Greed: How Emotions Drive Investment Decisions

In times of economic uncertainty, many investors are driven by fear. In times of economic growth, many investors are driven by greed. Giving in to these strong emotions, however, can harm your investment portfolio and hinder your long-term goals.

Following the Herd

When it comes to investing, fear can often be divided into two categories—one of losing hard-earned money and another of an under-performing market.

When stocks suffer from losses over a prolonged period, investors begin to panic and begin selling—resulting in prices dropping even further—and taking part in “herd behavior.” This behavior often stems from an assumption that others have done their homework and it’s best to follow their lead to avoid any perceived danger.

It's natural to feel the urge to follow the crowd, but it's important to pause and consider why. If you're investing for the long term, selling at a low point may not align with your goals. The stock market has historically performed well over longer time horizons, and downturns are often part of that cycle.

When others are driving prices down, it could actually present an opportunity—a chance to buy quality investments at a "discount" compared to their previous value. Staying patient and focused on your long-term strategy can often lead to better outcomes than reacting to short-term market swings.

Green with Envy

Unlike fear following a stock market bust, greed generally ramps up during a boom period. The desire to have more money—and quickly—can be overwhelming at times. For reactionary investors, the combination of fear and greed can result in common sense being cast aside. For example, during the height of the “dotcom” era in the late 1990s, investors eagerly grabbed the opportunity to be part of it and stocks reached an all-time high. The bubble burst in the early 2000s, however, sending prices on a downward spiral.

While greed can be a powerful motivator, chasing get-rich-quick schemes often comes with risks and can undermine a strong, long-term investment strategy. Instead, consider adopting an approach that you’d feel confident sticking with—whether the economy is booming or facing a downturn. This kind of balanced strategy can provide both stability and growth over time.

Practicing Patience

Investing is a long-term undertaking with patience being the main cornerstone of building wealth over time. Compounding gives your investments the opportunity to grow and generate further returns over an extended period. If you’re impatient and withdraw your money early, you may miss out on some hard-earned gains.

An unstable market often leads investors to pull their money out before they should. The markets are naturally volatile—rising and falling due to various factors on a daily basis. When emotions override patience, it can lead to panic selling or purchasing overpriced assets. Sticking with your carefully crafted, long-term strategy leaves you in a positive position once conditions stabilize.

Keep Calm and Carry On

With a 24/7 news cycle, it's easy to get caught in its endless loop. The ups and downs of the stock market are hard to walk away from and, in a volatile market, it’s even harder to not become fearful or greedy.

Even with an understandable fear of losing money due to underperforming investments, it’s important to put things into perspective and not the get caught up in the sentiment of the day. Before making any drastic decisions, do your own research, ask questions and consider your own person financial situation—not that of someone else.

Keep these tips in mind:

• Create a financial strategy that is tailored to your short- and long-term goals—whether it’s buying a home, paying for college tuition or retiring in the near future.
• Review your overall portfolio on a regular basis and help reduce risk by ensuring it’s well-diversified.
• Check that your asset allocation is still appropriate for your time horizon and goals.
• Take a closer look at your diversification and asset allocation portfolio at least once a year.
• When contemplating a change in your portfolio, don't forget to consider how long you've owned each investment. For example, the tax paid on a capital gain depends on how long you’ve held the asset before selling it.
• Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts.
• Consult with an experienced financial advisor who can provide you with an objective perspective and help you stay on track.

For more than 100 years, Busey Wealth Management has been providing trusted experience and proven results to our valued clients. Learn more about our holistic services and find an advisor near you by visiting busey.com/wealth-management.

This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.