Investor Psychology: The Key to Making Smart Decisions in the Market 

When it comes to investing, most people focus on picking the right stocks, finding the best superannuation fund, or minimising their tax bill. And don’t get me wrong, these things matter—strategies, asset allocation, and tax efficiency make up about 50% of what we do when advising clients. 

But the other 50%? It’s investor psychology—understanding how markets behave and, more importantly, how we behave in response. And when markets correct or crash, well, then it becomes 100% psychology. How we react during those times is the single most important investing decision we’ll ever make. 

Fear and Greed: The Market’s Greatest Influencers 

Stock markets are driven by two emotions: fear and greed. 

When markets are booming and stock prices are climbing to new highs, greed takes over. People throw caution to the wind, pouring more money into investments because they don’t want to miss out. This is when we see investors chasing returns, buying into stocks, ETFs, or property at inflated prices, often without a solid long-term plan. 

On the flip side, when markets crash, fear grips investors. Headlines scream doom and gloom, portfolios take a hit, and suddenly, the temptation to “get out before it gets worse” kicks in. This is when people panic-sell, locking in losses and missing out on future recoveries. It’s a vicious cycle: investors buy when prices are high, sell when prices are low, and then wonder why they never seem to get ahead. 

The truth is, the best investors—those who see the greatest long-term success—know how to control these emotions and resist the urge to make impulsive decisions. 

Market Cycles and Why Most Investors Get It Wrong 

Markets don’t move in a straight line. They go through cycles of growth, correction, and recovery. But most investors react to these cycles emotionally instead of rationally. 

• In a bull market (when stocks are rising), investors get overconfident. They start believing the good times will last forever, so they buy more—often at the top. 

• In a bear market (when stocks are falling), fear takes over. The news is all bad, portfolios are down, and investors feel helpless. So they sell out—often at the bottom. 

• Then the cycle repeats. 

The biggest mistake investors make is thinking that a market downturn is a problem to avoid rather than an opportunity to seize. The reality is, the further the market falls, the higher the future expected returns. And yet, it’s precisely at these moments that investors panic and flee. 

I often tell clients, “The time of maximum pessimism is the best time to invest.” That’s when the biggest opportunities exist—when fear is at its peak. 

How to Make the Right Decisions at the Toughest Times 

So, how do we make smarter investing decisions, especially when markets are volatile? 

1. Expect Volatility (It’s Normal!) 

Market corrections (drops of 10-15%) happen almost every year. Bigger declines of 20% or more (bear markets) occur every few years. These are not signs that something is broken—they are just part of how markets work. 

Rather than fearing volatility, prepare for it. Know that downturns will happen  and remind yourself that the market has always recovered over time. 

2. Have a Long-Term Plan 

Successful investing isn’t about timing the market; it’s about time in the market. If you have a solid long-term plan—one that considers your financial goals, risk tolerance, and time horizon—you won’t feel the need to react emotionally when the market wobbles. 

3. Avoid Checking Your Portfolio Too Often 

Watching the daily ups and downs of the stock market is like stepping on the scales every hour when you’re trying to lose weight—it’s not helpful and only makes you anxious. 

If you’ve invested for the long term, checking your portfolio too often will only tempt you to make unnecessary changes based on short-term noise. 

4. Use Dollar-Cost Averaging 

One of the best ways to remove emotion from investing is to invest a set amount regularly, regardless of what the market is doing. This strategy, called dollar-cost averaging, ensures you buy more when prices are low and less when they are high—automatically helping you avoid emotional decision-making. 

5. Remember: Inflation is the Real Risk 

Many people fear volatility, but the bigger danger is inflation eroding the value of your money over time. If you keep all your savings in cash or low-return assets because you’re scared of market downturns, you’re actually guaranteeing that your purchasing power will decline over the years. 

Long-term investing—despite its ups and downs—is the best way to outpace inflation and grow your wealth. 

Final Thoughts: Mastering Investor Psychology 

Investing is not just about what you invest in—it’s about how you behave as an investor. 

Understanding market cycles, recognising emotional traps, and sticking to a well-thought-out plan will set you apart from the average investor. 

This is why our role as advisers is about much more than just picking investments. It’s about helping people stay the course during tough times. 

As I always say: “We help you make the right decisions at the toughest times.” If you can master your investor psychology, you’ll be in a far better position to achieve long-term success. 

The information provided in this article is general in nature only and does not constitute personal financial advice.